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Krispy Kreme ‘poison pill’ seeks to prevent takeover

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(Winston-Salem Journal) — Krispy Kreme Doughnuts Inc. said Tuesday that its board of directors has adopted a new “poison pill” strategy to possibly discourage or thwart a hostile takeover bid.

Speculation of a potential offer for Krispy Kreme has surfaced in recent weeks, in part because management has done a remarkable job of bringing the company back from the corporate abyss to sustainable profitability.

Krispy Kreme has not responded to questions about the potential for receiving a takeover offer.

What the company adopted Tuesday was a tax-asset protection plan that has as its purpose preserving “the long-term value of the company’s federal net operating loss and other tax carry forwards.

The Winston-Salem-based company also said the board allowed a three-year shareholder protection rights agreement to expire Monday. Jim Morgan, the company’s chairman, chief executive and president, said in January 2010 that the shareholders rights plan “was adopted to deter abusive takeover tactics, but it was not adopted in response to any specific effort to acquire control of the company.”

Here’s how a poison pill typically works: When an investor or group buys a certain percentage of common stock in the company it is targeting, that company’s board can trigger the poison pill.

Shareholders typically are given the chance to buy additional or new shares at bargain prices, thus diluting the potential acquirer’s stake. In the agreement that expired Monday, the ownership percentage was 15 percent.

The tax-asset protection plan “represents a substantial asset to the company and its shareholders,” the company said.

Under federal tax law, a net operating loss occurs when tax-deductible expenses exceed taxable revenue in a year. Within certain limits, companies can shift a net operating loss to tax returns in previous fiscal years, known as a carry back, or to future fiscal years, known as carry forward, to lower their income tax for those years.

Krispy Kreme likely built up its $240 million in net operating losses during fiscal years 2004 through 2010. That amount was as of January 2012, the company said. The company said it has state net operating loss carry forwards and federal and state tax credits that can be carried forward.

“The plan should protect the company’s valuable tax assets by reducing the likelihood of an unintended ownership change under technical IRS rules,” Morgan said.

According to IRS code, a change in ownership would limit the value of the net operating loss and other carry forwards.

“There is no guarantee that the plan will prevent the company from experiencing an ownership change, and the company may pursue additional means of protecting this substantial asset,” the company said.

The company’s stock hit a six-year high of $11.96 a share Monday, a few days after an asset-management firm began following the company and estimated the stock could reach a $15 target price — a level it hasn’t seen in 8½ years.

The share price has doubled since July – when Krispy Kreme celebrated its 75th anniversary – and is up about tenfold since hitting a record low of $1.12 a share in March 2009. The company also is on pace for its third consecutive profitable year after struggling mightily for six years.

Krispy Kreme said the plan is designed to discourage any person from becoming a 5 percent shareholder, thereby reducing the risk of such an ownership change.

The company has only one investor that has more than a 5 percent stake, Mohamed Abdulmohsin Al Kharafi & Sons W.L.L. of Kuwait. It held up to 12.7 percent of Krispy Kreme stock before selling 1.05 million shares last year. According to insider trading data from MSNMoney, Kharafi & Sons holds 6.38 million shares for a 9.8 percent ownership stake.

BlackRock Institutional Trust Co. NA owns 3.17 million shares for a 4.9 percent ownership stake, while Vanguard Group Inc. owns 3.05 million shares for a 4.7 percent stake.

Shareholders holding 4.99 percent or more of the company’s outstanding shares of common stock are exempt from the provisions of the plan unless they make additional purchases.

The plan is expected to expire no later than Jan. 14, 2019.

Longbow Research analysts Alton Stump and Philip Terpolilli set the $15 target share price because they expressed confidence in management’s strategy of increasingly emphasizing smaller company-owned factory and satellite shops and international expansion.

“We are confident Krispy Kreme’s new production and distribution … will bear continued fruit in the form of impressive top- and bottom-line growth in coming years,” they wrote.

Those factors have propelled Krispy Kreme to the forefront of analyst speculation that it could be the next potential target of a recent frenzy by larger companies and private-equity groups buying quick-service restaurants and coffee retailers.

It is understandable why some analysts are placing the company in the middle of the bull’s-eye.

As Krispy Kreme’s share price and profitability rise, the bid price gets more expensive and may become less attractive as shareholders take a bite into its growth potential, at least in the short term.

Source: Winston-Salem Journal