BayStar steps back from SCO in new stock deal

By Matt Whipp

Posted on 2 Jun 2004 at 11:33

BayStar Capital has relinquished its hold on SCO, retiring its Series A-1 Convertible Preferred stock to the Unix company for $13mn cash and 2.1mn shares of common stock.

BayStar Capital led a $50mn investment in SCO last year in return for Series A convertible stock, which was later converted to Series A-1 stock with a current face value of $40mn.

$13mn in cash is about 20 per cent of SCO's cash reserves, but Dion Cornett, an analyst at Decatur Jones Equity Partners LLC, was positive about the deal. 'We believe that this is a very good deal for SCO shareholders as the company relieves itself of a major disgruntled investor and eliminates over $40mn in preferences ahead of common,' he said.

BayStar had previously had an antagonistic relationship with SCO. Along with the initial share purchase it had negotiated a number of voting rights, including an effective power of veto for any action SCO might take that could lead to its legal firms receiving its separately negotiated 20 per cent contingency fee.

The venture capital firm also took issue with the way SCO was conducting itself, in terms of its management, public relations and its continued efforts in its Unix business, which BayStar believed were essentially fruitless and would be better spent focussed on its licensing and litigation initiatives.

In April, BayStar demanded that SCO redeem its investment, claiming it had breached terms of the investment agreement.

However, these issues now seem to be resolved, and although there has not been any public signs that BayStar had not given approval for any of SCO's legal actions, that threat too has been lifted with this new deal.

'After productive and substantial discussions with SCO's management team, board of directors and legal team, BayStar is extremely satisfied with SCO's current operating and cash management plans, new initiatives, management of the litigation, and plans for improving its business going forward,' said Larry Goldfarb, managing general partner, BayStar Capital.

SCO's common stock was valued at $4.81 at yesterday's close. The 2.1mn common stock BayStar is to receive would be valued at about $10.1mn accordingly, although the stock won't be issued until BayStar has completed the necessary paperwork.

The deal limits BayStar to 10 per cent of the average daily trading volume of SCO stock for the rate at which it can sell its stock.