ADA — Pre-Paid Legal Services on Tuesday abruptly canceled a planned stock purchase just four days after announcing it would pay $27.4 million to buy 12 percent of four company insiders' holdings.
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The action was in response to "Monday's share price action and comments from several outside shareholders," according to a news release issued Tuesday morning.
Calls to the Ada company were not immediately returned.
The planned share buy-back was announced late Friday. Pre-Paid said it would buy 12 percent of the holdings of four corporate insiders totaling 639,000 shares.
Pre-Paid planned to buy 500,000 shares from Prescott Investors, which is managed by Pre-Paid Director Thomas Smith — Pre-Paid's largest shareholder. The company said it would buy 125,000 shares from Pre-Paid Chairman Harland C. Stonecipher; 8,000 shares from Pre-Paid Chief Operating Officer Randy Harp; and 6,000 shares from Pre-Paid Vice President Kathy Pinson. The company said it would pay the insiders $42.91 per share, the closing price from the day before the deal was announced. The purchase was to be funded with proceeds from a $75 million loan.
Monday, the next trading day after the initial announcement, Pre-Paid shares dropped more than $2 to close at $40.86 on heavier than average volume. After the deal was canceled, the stock added $1.61 on Tuesday to close at $42.47.
Pre-Paid has spent more than $280 million since 1999 to repurchase its shares. In that time, the company has reduced the number of shares outstanding by about 41 percent to 14 million shares.
Executives have said their aggressive repurchasing program is the best use of the company's cash, and that it boosts shareholder value. However, those executives acknowledge that the stock buy-back could hurt short sellers, who are betting that share prices will fall.
Short sellers borrow stock and sell it hoping to replace the borrowed shares by buying them at a lower price and pocketing the difference. Pre-Paid is one of the most shorted stocks on the New York Stock Exchange, with about 40 percent of the float in the hands of short sellers.
A shrinking pool of outstanding shares can trigger a "short squeeze" in which shorts are forced to buy at a loss to cover their borrowings and push prices even higher.
Despite cancelling the proposed insider deal, Pre-Paid said it would continue to buy shares in the open market "and consider additional private block purchases."
Pre-Paid markets a monthly subscription that provides access to attorneys for legal help with matters such as traffic tickets and wills. The company uses a multilevel marketing network of independent sales people who are paid commissions from their sales and sales of those they recruit.
