Royal Bank walks away from SCO investment

The Royal Bank of Canada is walking away from a US$30 million investment it made in The SCO Group Inc., in a move that may presage further legal and financial difficulties for the troubled Unix vendor, according to one financial analyst.

The Royal Bank, which had purchased 30,000 shares of preferred stock as part of an October 2003 investment in SCO, sold off its SCO holdings in two financial transactions, both of which occurred this month.

“We’ve unwound our position,” said Paul Wilson, a spokesman for the Royal Bank’s Capital Markets group, who declined to comment on why the Royal Bank had sold the stock.

Ironically, two thirds of the Royal Bank’s SCO stock was sold to BayStar Capital LP, the Larkspur, Calif., investment firm that was the other investor in the October deal, which totaled US$50 million, after it was introduced to SCO by Microsoft Corp.

A BayStar spokesman declined to say what his company had paid for the 20,000 shares of SCO preferred stock it purchased recently, or why BayStar would purchase stock in SCO just one month after asking for its money back.

“The timing and price of our purchase of (the Royal Bank of Canada’s) holdings in SCO presented a strategic and financial opportunity for BayStar and its investors,” he said.

BayStar has had concerns over SCO’s “failure to take the appropriate steps to leverage the IP (intellectual property) asset that they have,” the spokesman said. But, he added, “we continue to believe that there is a valuable IP asset in SCO and that it is one that could generate a return for all the shareholders of the company.”

The Royal Bank’s other 10,000 shares are being converted to 740,740 shares of SCO common stock at the rate of US$13.50 per share, which means that the Royal Bank paid more than twice the current value of SCO’s common shares. Recently, SCO common shares were trading at US$5.90.

This means that the Royal Bank will most likely take a loss on the deal, said Dion Cornett, an analyst with Decatur Jones Equity Partners LLC, an equity research firm based in Chicago.

Cornett expects the Royal Bank to sell its common stock as soon as it has filed the necessary paperwork. “No one converts a preferred stock unless they’re planning on selling,” he said.

The Royal Bank’s moves will put pressure on SCO’s stock price, making it difficult for SCO to raise future funds. The fact BayStar has acquired more SCO stock may be an indicator that the investment company is planning legal action against SCO, Cornett said.

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