Professor Mike Lord comments on Krispy Kreme's "poison pill"

Krispy Kreme bolsters defenses
It prepares a ‘poison pill’ against any takeover try
Originally Posted on Monday, January 18, 2010 | By Richard Craver
Reposted from the Winston-Salem Journal

The threat of a hostile takeover isn’t hanging over Krispy Kreme Doughnuts Inc. – at least not yet.

But its board of directors decided Friday that it wants a formidable strategy – containing a so-called poison pill – ready just in case.

The board adopted a new shareholder-rights plan to replace the plan that expires Monday. It will be in effect for at least three years.

Poison pills are used to try to hold off hostile-takeover attempts by making it more expensive for a suitor to acquire shares. Krispy shareholders would be awarded one “right” for each outstanding share of stock they own as of Monday.

Reynolds American Inc. adopted a poison pill in July 2004. BB&T Corp. had one for nearly seven years before letting it expire in February 2004.

Jim Morgan, the chairman, chief executive and president of Krispy, said that the 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.“

Morgan said that the new plan gives the board “negotiating leverage” if a hostile bid does not “provide shareholders with the full value of their investment.“

With Krispy moving closer to a return to annual profitability after six years, and major accounting, legal and regulatory issues apparently resolved, analysts say that potential suitors may feel more comfortable exploring a bid.

In late November, there were reports the Wendys Arbys Group was interested in Krispy to add a proven breakfast component to its menu. Analysts said that such a deal would not be surprising given Wendy’s owned doughnut and sandwich maker Tim Hortons for 10 years before spinning it off in 2006.

Because Wendys Arbys’ share price is not much higher than Krispy’s, any deal would have to be primarily in cash, analysts said. Krispy was unchanged Friday at $2.99. Wendys was down 2 cents to $4.65.

Here’s how a poison pill works: When an investor or group buys a certain percentage of common stock in the company they are 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 Krispy’s plan, the percentage is 15 percent.

Krispy’s top individual stakeholder, at about 9.1 million shares, is a Kuwaiti contractor, Mohamed Abdulmohsin Al Kharafi & Sons WLL, according to the Securities and Exchange Commission. That stake was worth 13.8 percent in February 2008 – the last time the group bought or sold stock. Mohamed Abdulmohsin controls Krispy’s franchisee in the Middle East.

Some rating agencies and corporate-governance groups don’t like poison pills because they believe they are more valuable to entrenched management than shareholders.

However, because poison pills tend to maintain the status quo, it can be good for the company’s work force and the local community since new ownership could move jobs and the headquarters.

“Such a move doesn’t automatically mean that the company is in play,“ said Michael Lord, an associate professor of management at Wake Forest University. “Sometimes management and the board take such actions proactively or preemptively.

“If an acquirer were actively looking at Krispy Kreme, they may be more interested in the brand than in the business operations.“

Adopting the poison pill is management’s sign that it believes the share price doesn’t reflect the true value of the company, said Peter Tourtellot, the managing director of Anderson Bauman Tourtellot Vos & Co., a turnaround-management company in Greensboro.

“Management has done a considerable amount of work to improve revenues and profit and it is beginning to show,“ Tourtellot said. “Since turnarounds of this type take a long time, it is my belief that over time the stock price will start reflecting the overall improvement.

“But today, the price per share is low and is a good candidate for an unfriendly suitor to buy a large percentage of shares.“