There is new information about Kalani Investments Limited, the mysterious investor DryShips Inc. (NASDAQ:DRYS) uses to dilute its shareholders. It turns out Kalani is not a proxy for George Economou and is actually owned by a Canadian hedge fund manager named Marc Bistricer and his firm Murchinson Ltd.
This is good news for DryShips because it mitigates concerns over related party transactions in the already controversial company. But several questions remain unanswered. Why does Kalani conduct these deals with DryShips, and how does it profit from them? This may have something to do with the timing of Economou’s stock splits.
Kalani – Dilution Made Easy
Kalani Investments is a private firm domiciled in the British Virgin Islands, a tax haven renowned for its secrecy. Economou has used the entity as an underwriter. But instead of the traditional ways of raising capital like direct public offerings or investment banks, DryShips issues stock directly to Kalani. Kalani then sells these shares to retail investors on the secondary market.
It looks like Kalani profits in one of two ways. Either it purchases the shares at a discount to sell them at a higher price, or it breaks even on the shares and profits from the commitment fee from DryShips. The commitment fee for the April dilution was $1.5 million in common stock. Perhaps this fee can be considered the ‘floatation cost’ of the capital raise.
But why would Kalani want $1.5 million in DryShips stock right before a R/S split and dilutive capital raise destroys its value? The only way this deal makes sense is if Kalani gets its commitment-free after the stock has already been split.
DryShips announced its capital raise with Kalani on April 3, 2017. Three days later, DryShips announced a stock split. If Kalani received $1.5 million worth of DryShips shares on the 3rd, its investment would have lost over 60%. But according to the dividend announcement, DryShips had only 47 million shares outstanding on April 11, 2017, eight days after the dilution was announced.
This means Economou R/S split the stock but still had not started diluting yet it. Economou probably waits until after the R/S split to pay Kalani its fee. Perhaps the payment of the fee is timed to correspond with a rally in the stock (such as when the deal closes).
Convenience seems to be the appeal of using Kalani instead of a direct public offering or a traditional underwriter. DryShips’ prior direct public offerings were nowhere near the scale of these recent Kalani deals. And DryShips seems to have gotten the short end of the stick in its prior dealings with more ‘reputable’ institutions.
It turns out Kalani Investments is not George Economou, and DryShips bulls can breathe a sigh or relief- because while DryShips remains dysfunctional, at least it isn’t dysfunctional enough to sell shares to its own CEO.
The relationship between Kalani and DryShips seems to be a regular underwriter relationship whereby Kalani profits from the commitment fees it gets from DryShips. Economou times his R/S stock splits to start before the dilution so Kalani can receive its commitment fee at the inflated share price before dilution drives the stock price down. The owners of Kalani may also make money by shorting DryShips.