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Danka's top investor still awaiting payoff

By SCOTT BARANCIK
Published June 19, 2006

Note to shareholders of Danka Business Systems PLC: Its No. 1 investor feels your pain.

Cypress Group LLC sank $200-million into Danka in late 1999 when the office equipment distributor was enjoying a resurgence. In return, the New York private-equity group received convertible preferred stock, two seats on Danka's board of directors and an annual dividend of 6.5 percent.

The investment has been a disappointment. With Danka's stock price hovering around $1 - MotleyFool.com recently ranked it one of the 10 poorest performers of the past decade, excluding some smaller public companies and others that went out of business - it doesn't make sense for Cypress to convert from preferred to common stock at $12.50 per share.

The dividend situation isn't ideal, either. Under the 1999 agreement, St. Petersburg's Danka was supposed to fulfill its 6.5 percent dividend obligation through 2005 by giving Cypress additional preferred stock, which it did. After that, it was supposed to pay cash.

But Danka's distributable profits - a British financial concept - have been insufficient. As a result, the company has continued to pay its dividends with preferred stock. Cypress hasn't received a penny of cash.

That's not to say Cypress won't someday be happy it received Danka stock rather than cash; in 1996, the stock briefly broke $50.

But in the meantime, the best news for Cypress may be that it recently added a third member to Danka's board of directors. The 1999 agreement allowed Cypress to have up to four directors if Danka missed at least six consecutive quarters of cash dividend payments, which it has.

[Last modified June 19, 2006, 06:20:20]