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 week.

"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, California, investment firm that was the other investor in the October deal, which totaled $50 million, after it was introduced to SCO by Microsoft Corp.

In April, BayStar accused SCO of breaching parts of its investment agreement, and asked that its $20 million share of the deal be returned.

A BayStar spokesman declined to say what his company had paid for the 20,000 shares of SCO preferred stock it purchased this week from the Royal Bank, 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 $13.50 per share, which means that the Royal Bank paid more than twice the current value of SCO's common shares. On Friday afternoon, SCO common shares were trading at $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 soon as it has filed the necessary paperwork to complete the transaction "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, make it difficult for SCO to raise future funds, and the fact that BayStar has acquired more SCO stock may even be an indicator that the investment company is planning legal action against SCO, Cornett said. "It's bad news for SCO on three fronts," he said. Ownership of more shares in SCO, for example, might give BayStar greater standing in a possible lawsuit against the company.

SCO downplayed the effect of the Royal Bank's actions. "It really has no impact from a financial standpoint because the $50 million investment continues to reside with SCO," said Blake Stowell, a SCO spokesman.

SCO claims that Linux violates its IP, and has become involved in lawsuits with IBM Corp., Novell Inc., Red Hat Inc. and two Linux users in connection with these claims. Linux advocates say that SCO has yet to prove any of its IP claims and accuse the Lindon, Utah, company of being part of a Microsoft-backed attack on the open source operating system.

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