First Advantage (NASDAQ:FA) shares fell 8% on Tuesday morning after investment funds affiliated with Silver Lake Group announced plans to sell 12.5 million shares of the background screening and identity solutions company through a secondary offering.
According to Bloomberg, the shares are being marketed at between $22.20 and $23.59 each. First Advantage shares closed Monday at $23.59, meaning the bottom of the proposed range represents a discount to the previous closing price.
Silver Lake plans to sell 12.5 million shares
The offering involves existing First Advantage shares held by certain Silver Lake investment funds and affiliates rather than newly issued stock.
As a result, First Advantage will not sell any shares in the transaction and will receive none of the proceeds. All proceeds will go to the selling stockholder.
The distinction means the offering itself does not raise additional capital for First Advantage or directly increase the number of shares outstanding.
J.P. Morgan Securities LLC is acting as underwriter for the transaction, which is being conducted under a registration statement filed with the U.S. Securities and Exchange Commission.
Secondary offering puts pressure on First Advantage stock
The 8% decline in First Advantage shares highlights the near-term market pressure that can accompany a large shareholder reducing its position.
With 12.5 million shares being offered and the marketing range extending below Monday’s closing price, investors are being presented with a sizeable block of existing stock at potentially discounted levels.
While the transaction does not dilute existing shareholders through the issuance of new shares, the additional supply entering the market may weigh on trading sentiment in the near term.
Silver Lake agrees to 30-day lock-up
As part of the transaction, the selling stockholder has entered into a 30-day lock-up agreement with the underwriter.
However, Silver Lake plans to distribute up to 4.2 million First Advantage shares to its limited partners on or around the offering’s closing date. Those shares will not be covered by the lock-up agreement.
First Advantage’s directors and officers will also not be subject to a lock-up with the underwriter.
For investors, the immediate focus is therefore less about First Advantage’s underlying operations and more about changes in the company’s shareholder structure and the potential supply of stock. The final pricing of the 12.5 million-share offering, along with trading following its completion, will be important indicators of how readily the market absorbs the additional shares.