Saturday, May 03, 2008

Business Reporting 101 - prepositions are important

It's always important to get the numbers right, but I can't think of areas where it's more important than in science and business reporting. People make decisions based on what you report in those areas -- decisions that can affect their health or their wealth.

Thus comes today's lesson that not only the numbers -- but the prepositions -- are critical. The story is the recapitalization plan by troubled banking company South Financial Group. (Yahoo finance link).

From The State newspaper this morning (that link will expire in about seven days because of McClatchy's ill-advised archive policy -- someday someone's going to get that even if you put it behind the wall, leaving a link to find it on the general Web is smart; you might even sell a few more archive hits):
South Financial is raising $250 million from a preferred stock offering, up to an additional $100 million from other borrowings and cutting the common share dividend by four cents a year — a move bank officials estimate will save about $52 million in 2008.
From the company's news release (which you will also find picked up at Reuters and several other places):
TSFG's common stock cash dividend will be reduced to $0.04 per share on an annualized basis. This will enable TSFG to preserve approximately $52 million annually in retained capital.
You might notice a small difference -- with a big effect: The State uses "by," while TSFG uses "to." It's a 68-cent difference per share, as a matter of fact, and that adds up pretty quickly. The State would lead people to believe the drop in the dividend is 5 percent (based on the current dividend of 76 cents per share), when the actual drop is 94 percent.

The State's graphic just reinforces the error.

The Greenville News, TSFG's hometown paper, got it right and threw in a few other useful details, but everyone missed the bigger story here, and that is how a recapitalization plan is going to drastically change the common stock picture of this bank. Instead of throwing around arcane terms, it would have been nice to see business stories cut to the point: TSFG's shareholders will see serious dilution of their investment along with the slash in the dividend. And it appears some insiders may be getting a sweet deal in the process.

The explanation:
  • The 250,000 shares of preferred stock ($1,000 each) at a 10 percent dividend are mandatory convertible shares. In other words, the bank has no choice. Three years from now those shares must be converted into common stock.
  • When they are converted, at 153.846 shares of common to one share of preferred, the resulting addition of almost 38.5 million shares will increase the outstanding shares by more than 50 percent. That seriously dilutes current equity.
  • The conversion is at $6.50 per share, a highly favorable price (shares closed at $6.86 Friday), unless the bank's executives are, essentially, saying they think the bank will actually tank in the next three years.
  • The preferred holders get voting rights as though they held all those common shares. If current shareholders don't approve granting those rights, the yield on the preferred shares increases substantially.
  • The company press release just talks about unidentified "institutional" investors, but the 8-K and Tampa Bay Business Journal say some current directors also are buying the shares. Their identities are not disclosed, and apparently neither Columbia nor Greenville thought to ask about what would seem to be highly relevant information (though Greenville did a follow-up interview with CEO Mack Whittle).
As you might guess, I was a business reporter at one time in my life. And the current state of business reporting at too many papers is distressing. Nothing I've laid out here was hard to find or particularly arcane if you are supposed to be covering business. It's all in the company's release and its 8-K filed with the SEC. Those and other links are available at several places on the Web, most commonly Yahoo finance. A moment of thinking would have brought it all together.

It took me about 10 minutes to read them and lay out the numbers. Should we expect anything less from our newspapers whose writings may be affecting people's lives?

I don't have a problem with newspapers cutting back. It's a business reality. But if you are going to do less, do it right.

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