(Bizarre)Lazare Kaplan International (LKI): Going Private?

Diamond company and perennial net/net Lazare Kaplan International recently issued its latest proxy. Like most proxies, the items to be voted on at the November 8th annual shareholders meeting are fairly routine. That is, with the exception of the third item.

The company is asking shareholders to vote on the following company sponsored proposal:

“To consider and vote on a proposal to amend the Company’s Certificate of Incorporation to effect a reverse stock split immediately followed by a forward stock split of the Company’s shares of common stock..”
There’s nothing strange about a reverse stock split, it happens fairly often. But what Lazare Kaplan is proposing is a bit different. The company wishes to initiate a 1 for 101 reverse split, buy out any shareholders with less than 1 share post split, followed by an immediate 101 for 1 forward split. Say what?

Lazare says that this will allow the company to buy back stock from any shareholder that currently holds less than 100 shares. The company cites savings of $25,000 per year by eliminating the $11.50 annual fee associated with each company shareholder for transfer agent fees, and printing/postage costs associated with mailing shareholder reports. All this effort for $25,000 in annual savings? We think there’s more to this story.

Setting itself up to go Private?
According to the company, as of September 14th, 2007 there were 1709 shareholders of record, 1644 of which held less than 101 shares, which means that 96% of the registered shareholders own just .045% of the outstanding shares. If Lazare can buy these shareholders out, that will leave just 65 shareholders of record, well below the 300 threshold necessary to de-list, avoid SEC filing and SarBox, while still being able to trade on the Pink Sheets (a situation we’ve covered in several previous posts).

While we believe there are indeed cost savings in eliminating shareholders with small lots, we believe the real reason for the split is to “go dark”. We’re not sure why they just don’t acknowledge that in the proxy. Perhaps they don’t want to draw more interest and attention, and actually increase shareholder roles. We believe that there’s sometimes value to be had in these situations, and Lazare may want to keep its true intentions close to the vest.

For our part, we are still long Lazare Kaplan, and might just have to attend the shareholder meeting and ask the question.

Lazare Kaplan Intl
Ticker: LKI
Price: $7.55
Mkt Cap: $62.4 million
NCAV: $70 million
Mkt Cap/NCAV:1.12
Book Value/Shr: $11.30
Price/Book: .67

*The author has a position in Lazare Kaplan (LKI). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.