What happened
Aerospace component manufacturer Ducommun (DCO 0.33%) is raising cash to pay down its debt, but the offering came at a significant discount to the company's share price. Investors are now sending the stock down toward that level, chopping about 16% off of Ducommun's shares as of 1 p.m. ET.
So what
Ducommun is a manufacturer of complex components for customers in the aerospace, defense, and industrial markets. It can be a commoditized business at times, and scale matters. Ducommun, like many of its peers, uses mergers and acquisitions to add to its scale, and earlier this month completed a purchase of BLR Aerospace.
Now the company is looking to pay down the debt it took on to buy BLR. Late Monday, Ducommun announced a 2 million share secondary offering to raise cash to repay what it took out of its revolving credit facility to finance the acquisition.
Ducommun priced the offering at $40 per share, at the low end of the $40 to $42 range given. The stock closed on Monday trading at $48.42, meaning the company had to offer a steep discount to get the deal done.
Now what
Secondaries almost always price below the current stock price. It's the size of the discount that seems to be catching investors off guard. The added 2 million shares could also alter the supply and demand dynamics of the stock at least the near term because Ducommun had only about 11.14 million shares available for trading prior to the offering.
But for investors focused on the long term, the secondary is likely to be nothing more than a speed bump. If management can successfully integrate BLR and grow the business, the dilution will be more than justified. Over the next few quarters it will be the integration of BLR, and not the secondary, that really drives Ducommun shares higher or lower.
