CoolBrands trading frenzy cancelled

…company's "improper dissemination of the news." What the company failed to do was alert RS that the news was coming and ask the regulator to halt trading in its shares, he said.

The Globe and Mail
July 29, 2004

CoolBrands trading frenzy cancelled
Extraordinary step taken after failure to alert regulators to news of contract loss
Karen Howlett and Richard Bloom

Regulators took the extraordinary step of unwinding trading in more than one million CoolBrands International Inc. shares yesterday after a frenzied selloff wiped out more than $350-million of market value on news that the frozen-treats maker had lost a major contract.

CoolBrands stock plunged 39 per cent to $10.30 during the final 36 minutes of trading yesterday on heavy volume. But all the trades that took place during that period were cancelled, leaving the final trade at $16.90 on the Toronto Stock Exchange, down $1.10 on the day.

The company, which makes ice-cream products under the Weight Watchers, Atkins and Eskimo Pie banners, said in a brief statement yesterday that its licence agreement with Weight Watchers will cease on Sept. 28. Analysts estimate the contract will account for as much as 18 per cent of CoolBrands' sales this year.

Market Regulation Services Inc., known as RS, took the unusual step of cancelling every trade in the company's stock after 3:24 p.m. yesterday afternoon. RS spokesman Doug Maybee said the trades were cancelled because of the Markham, Ont.-based company's "improper dissemination of the news."

What the company failed to do was alert RS that the news was coming and ask the regulator to halt trading in its shares, he said.

"When there's news of the magnitude that CoolBrands had, we would have halted trading in the stock until the information was properly absorbed by the market," he said. "We want to make sure everyone has the opportunity to react to news, particularly negative material news as was the case this afternoon. That means the big guns as well as the mom and pop [investors]," he said.

The news came out at 3:22 p.m. At 3:24, the first trade took place and the shares "fell like a stone," sounding the alerts on RS's surveillance systems, he said.

Michael Serruya, co-chairman of the company, could not be reached for comment yesterday.

In its news release, CoolBrands said that as part of the cancellation of the agreement with Weight Watchers, it has the right to continue marketing Smart Ones frozen desserts using the Weight Watchers name for another year.

"Thereafter, the company intends to continue marketing its line of low fat and fat-free 'better for you' frozen desserts under an alternative brand licensing arrangement currently under discussion," the company said.

Even before CoolBrands' announcement yesterday, investors were hitting the sell button. Trading was unusually heavy, with nearly 1.5 million shares changing hands. This compares with average daily volume of just 286,000 shares during the past three months.

Mr. Maybee said RS would be examining trading in the shares.

Analysts said yesterday that the cancellation of the licence agreement with Weight Watchers was bad news for CoolBrands.

"The company is built around a better for you growth story, so when you lose your No. 1 brand, you lose your story as well as a lot of earnings," said one equity analyst, who asked not to be identified.

"It's the centrepiece of the story and it goes to the view that people had thought their licences were multiyear and secure ."

Kevin Lo, an analyst at Calgary-based Lightyear Capital Inc., said he was surprised by the news — especially given the company's strong earnings only a week ago.

"Weight Watchers is a very high margin product for the company and in our estimates, counted for over $100-million of revenue in '03 but probably $120-million to $140-million in '04," Mr. Lo said in an interview. (According to a survey conducted by Multex.com Inc., CoolBrands is expected to generate sales of $768.8-million in 2004).

"So, preliminarily, you can probably see a 20-cent [earnings per share] dip because of that… . Was I surprised? Absolutely."

Last Thursday, CoolBrands posted a third-quarter profit of $19.1-million or 34 cents a share for the three-month period ending May 31 — up sharply from its year-earlier profit of $9-million or 17 cents a share. Sales during the quarter also more than doubled to $187.2-million from $81.9-million.

There was no mention of the Weight Watchers contract in the earnings report.

The stock price fell steadily following the news release. In just a matter of minutes, it had fallen $1.80 to $15.10. At one point during the 36-minute period, the stock price dipped as low as $10.20.

Just last week, the stocks traded well above $20. In March, the stock soared to a 52-week high of $27.

Meanwhile, at 3:23 p.m. CoolBrands issued a separate release saying that its pact with Dreyer's Grand Ice Cream Inc. to make the Skinny Cow brand of frozen treat had been extended.


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