Royal Bank of Canada Bails on SCO Investment

The Royal Bank of Canada is bailing out of its SCO investment, and BayStar is picking up the majority of the bank's SCO holdings.

The financial turmoil surrounding The SCO Groups funding flared on Friday with the word that the Royal Bank of Canada will withdraw its direct investment with the company. The move could bolster investment BayStar Capitals position in its effort to steer SCOs course.

The SCO Group Inc. announced that it had received on notice that the Royal Bank of Canada (RBC) has elected to convert 10,000 shares of SCOs Series A-1 convertible preferred stock it currently holds into a total of 740,740 shares of SCOs common stock. The Toronto-based RBC will then be able to sell these common stock shares on the stock market if it so chooses.

The RBC also informed SCO that it sold its remaining 20,000 shares of Series A-1 stock to BayStar Capital II LP, which already owns $20 million worth of A-1 stock shares.

After the deal is done, the RBC will have no equity interest in SCO other than the shares of common stock it receives from the conversion. Following the sale, BayStar will be the sole remaining holder of SCOs outstanding A-1 shares, giving BayStar a $40-million share of SCOs approximately $85-million total market capitalization.

The conversion will occur as permitted under SCOs Certificate of Designation, Preferences and Rights relating to the Series A-1 stock. The A-1 stock was purchased at a price of $1,000 per share, and will be converted to common stock based on a conversion price of $13.50 per share, the company said.

Recent moves by Larkspur, Calif.-based BayStar show that the investment firm is unhappy with SCOs current management and business plans. First, the company demanded that SCO redeem BayStars shares of A-1 stock, claiming that SCO had breached sections of the pairs agreement. This move, according to SCO, came as a complete surprise.

Later, SCO said that BayStar sought greater control of SCO. In an April interview with, BayStar spokesman Bob McGrath said that the investment company wanted SCO to change its management team to one that was "experienced in litigation issues" and to focus all of its energies "its most valuable asset: its intellectual property claims." He considered that SCO had not been doing a good job of communications with its shareholders.

SCO has insisted several times since then that it is going to stay its course with its current management team. The Lindon, Utah-based company has, however, added a new CFO and laid off a few employees since then. All moves that SCO said have nothing to with BayStars demands for change in the company.

The RBCs move could now give BayStar more economic clout. McGrath declined to discuss the terms of the companys purchase of the additional A-1 shares or to offer details on which party initiated the deal.

"The timing and price of our purchase of RBCs holdings in SCO presented a strategic and financial opportunity for BayStar and its investors," he said, in a prepared statement.

According to Stacey Quandt, principal analyst of Quandt, "RBC probably went into the deal as an investment, and now they appear to have lost confidence in SCOs ability to win its case, so theyve decided to cut their losses."

Additional reporting by Matt Hicks.

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