DC.PR.C: Dundee Sweetens Exchange Offer … Still Abusive

Dundee Corporation has announced:

the postponement of its special meeting of holders of its First Preference Shares, Series 4 par value of $17.84 (the “Series 4 Preferred Shares” and the holders thereof, the “Series 4 Preferred Shareholders”), which was originally scheduled for January 7, 2016 until January 28, 2016 in order for Series 4 Preferred Shareholders to consider amendments to the terms of the Company’s previously announced preferred share exchange transaction (the “Amended Exchange Transaction”). The December 3, 2015 record date will remain the same. The amendment follows consultations with a number of the Series 4 Preferred Shareholders. The terms of the Amended Exchange Transaction are outlined below:
  • •In consideration for extending the date on which the Series 4 Preferred Shares would become retractable by the holder thereof, being June 30, 2016, for an additional three year period to June 30, 2019, each Series 4 Preferred Shareholder will exchange their Series 4 Preferred Share pursuant to a statutory plan of arrangement under the Business Corporations Act (Ontario) for:
    • ◦0.7136 of a First Preference Share, Series 5 par value $25.00 (the “Series 5 Preferred Shares” and each holder thereof a “Series 5 Preferred Shareholder”); plus
    • ◦0.25 of a subordinate voting share purchase warrant (“Warrant”), each whole Warrant entitling the holder thereof to purchase one class A subordinate voting share of the Company (a “Subordinate Voting Share”) at a price of $6.00 per Subordinate Voting Share at any time on or prior to 5:00 p.m. (Toronto time) on June 30, 2019. The Company is applying to the Toronto Stock Exchange (the “TSX”) for the listing of the Warrants.

The Terms of the Series 5 Preferred Shares

The rights, privileges, restrictions and conditions of the Series 5 Preferred Shares are identical to those of the Series 4 Preferred Shares, except that:

  • •The cumulative dividend rate will increase from 5.0% to 7.5% per annum, being an annual dividend of $1.875 per Series 5 Preferred Share, or a quarterly dividend of $0.46875 per Series 5 Preferred Share;
  • •Up to 15% of the then outstanding Series 5 Preferred Shares of each Series 5 Preferred Shareholder will be subject to redemption at the holder’s option for its par value on June 30, 2016;
  • •A further 17% of the then outstanding Series 5 Preferred Shares of each Series 5 Preferred Shareholder will be subject to redemption at the holder’s option for its par value on January 31, 2018; and
  • •The Series 5 Preferred Shares will be redeemable by Dundee at (i) $25.75 per share if redeemed prior to June 30, 2017, (ii) $25.50 per share if redeemed on or after June 30, 2017 and prior to June 30, 2018, (iii) $25.25 per share if redeemed on or after June 30, 2018 and prior to June 30, 2019, and (iv) $25.00 per share if redeemed on or after June 30, 2019, plus, in each case, an amount equal to all accrued and unpaid dividends thereon to but excluding the date fixed for redemption. Currently, the Series 4 Preferred Shares are redeemable by the Company at par together with any accrued and unpaid dividends to but excluding the redemption date.

Consent Payments

The one-time consent fee of up to 1.25% that would have been payable to Series 4 Preferred Shareholders who voted in favour of the prior proposal has been replaced by a 1.5% per year increase in the dividend rate payable to all Series 5 Preferred Shareholders in the event that the Amended Exchange Transaction proceeds. If the Amended Exchange Transaction is completed, Dundee will make certain payments (the “Consent Payments”) to the brokers, investment dealers, banks, trust companies or other intermediaries of the Series 4 Preferred Shareholders (collectively, the “Intermediaries”), subject to certain procedures and conditions which will be outlined in the revised Circular (as defined below):

  • •a Consent Payment of $0.1784 per Series 4 Preferred Share, representing 1.00% of the par value of the Series 4 Preferred Shares, will be paid by Dundee to Intermediaries in respect of each Series 4 Preferred Share that is voted FOR the Arrangement Resolution (as defined below) on or prior to January 21, 2016, provided such vote is valid and is not subsequently withdrawn; and
  • •a Consent Payment of $0.0892 per Series 4 Preferred Share, representing 0.50% of the par value of the Series 4 Preferred Shares, will be paid by Dundee to Intermediaries in respect of each Series 4 Preferred Share that is voted FOR the Arrangement Resolution after January 21, 2016 but on or prior to the proxy cut off time of 9:00 a.m. (Toronto time) on January 26, 2016, provided such vote is valid and is not subsequently withdrawn.

The Postponed Meeting

In connection with the Amended Exchange Transaction, a special meeting of the Series 4 Preferred Shareholders has been scheduled for 9:00 a.m. (Toronto time) on January 28, 2016 (the “Meeting”), at the offices of Dundee Corporation, 1 Adelaide St. East, Suite 2100, Toronto, Ontario, Canada, M5C 2V9. The Amended and Restated Management Information Circular of the Company (the “Circular”) for the postponed Meeting will be mailed to the Series 4 Preferred Shareholders and filed on SEDAR shortly.

Series 4 Preferred Shareholders are encouraged to vote regardless of how many Series 4 Preferred Shares they own. Series 4 Preferred Shareholders should follow the instructions on the voting instruction form to be provided by their Intermediary to ensure their vote is counted at the Meeting.

Due to the changes in the proposed terms, any votes and any dissents previously submitted by Series 4 Preferred Shareholders in accordance with the instructions provided in the previous management information circular dated December 3, 2015 will not apply to the amended terms. Shareholders can anticipate receiving a new voting instruction form and control number in the mail. Even if Series 4 Preferred Shareholders have voted previously, in order for their vote to count, they must use the new voting instruction form to instruct their Intermediary how to vote on their behalf. Series 4 Preferred Shareholders who wish to vote or dissent in respect of the Amended Exchange Transaction should refer to the instructions in the Circular on how to do so.

To be effective, the Amended Exchange Transaction must be approved by a resolution (the “Arrangement Resolution”) passed at the postponed Meeting by not less than two-thirds (66 2/3%) of the votes validly cast by the Series 4 Preferred Shareholders present in person or represented by proxy.

The completion of the Amended Exchange Transaction is conditional on, among other things, the holders of the Series 4 Preferred Shares approving the Arrangement Resolution, the approval of the TSX, dissent rights not having been exercised with respect to more than 10% of the issued and outstanding Series 4 Preferred Shares, any required lender approvals and other customary conditions (unless waived by the Company).

Reasons for the Amended Exchange Transaction

The Company has engaged GMP Securities L.P. (“GMP”) as its financial advisor and dealer manager, and Shorecrest Group Ltd. as its proxy advisor and paying agent in connection with the Amended Exchange Transaction.

The board of directors of Dundee (the “Board of Directors”) has unanimously determined that the Amended Exchange Transaction is fair to the Series 4 Preferred Shareholders (as well as to the holders of all other classes and series of shares) and is in the best interests of Dundee, and unanimously recommends that the Series 4 Preferred Shareholders vote FOR the Arrangement Resolution. The determination of the Board of Directors is based on various factors, including a fairness opinion prepared by GMP.

By recommending the Arrangement Resolution to the Series 4 Preferred Shareholders, the Board of Directors believes the Arrangement Resolution provides a number of anticipated benefits to the Series 4 Preferred Shareholders, including, without limitation, the following:

  • a.The Series 5 Preferred Shares will have a dividend rate of 7.5% per annum, which is greater than the current dividend rate on the Series 4 Preferred Shares of 5% per annum;
  • b.Each Series 4 Preferred Share (each having a par value and redemption price of $17.84 per Series 4 Preferred Share) will be exchanged for (i) 0.7136 of a Series 5 Preferred Share par value $25.00, aligning with standard market convention; plus (ii) 0.25 of a Warrant, each whole Warrant entitling the holder thereof to purchase one Subordinate Voting Share at a price of $6.00 per Subordinate Voting Share at any time prior to 5:00 p.m. (Toronto time) on June 30, 2019;
  • c.Up to 15% of the then outstanding Series 5 Preferred Shares of each Series 5 Preferred Shareholder will be subject to redemption at the holder’s option for its par value on June 30, 2016;
  • d.Up to an additional 17% of the then outstanding Series 5 Preferred Shares of each Series 5 Preferred Shareholder will be subject to redemption at the holder’s option for its par value on January 31, 2018; and
  • e.Currently, the Series 4 Preferred Shares are redeemable by the Company at its option at par, together with any accrued and unpaid dividends to but excluding June 30, 2016. The Company will not be able to redeem the Series 5 Preferred Shares at its option prior to June 30, 2019 unless it pays a redemption premium over par.

The Board of Directors also believes that the Arrangement Resolution provides a number of anticipated benefits to the Company and indirect benefits to the holders of the other classes (and series) of shares of the Company as follows:

  • a.By extending the retraction date of the Series 4 Preferred Shares through the issuance of the Series 5 Preferred Shares from June 30, 2016 to June 30, 2019, the Company can repurpose certain capital that would have been needed should the holders have required the Company to redeem the Series 4 Preferred Shares on or after June 30, 2016 at the par price of $17.84 per Series 4 Preferred Share;
  • b.The Company will maintain financial flexibility for future opportunistic business developments; and
  • c.The Series 5 Preferred Shares will continue to be serviceable at an attractive cost of capital.

Why is this offer still abusive? Because there is no provision for shareholders who want the original deal to get the original deal. Virtually every preferred share term extension voted on by shareholders provides for a Special Retraction Right, which allows shareholders who so desire to cash out their shares on the original terms. I get extremely upset when such a provision is not made.

The fact that there is no such provision implies that the company is afraid of a mass retraction, which indicates that the company knows its offer is no good – an implication that is given further support by the fact that consent payments to intermediaries are still revoltingly high. But how good should the offer be?

The closing price of 14.43 today will reflect a number of things:

  • Widespread feeling that the original offer would pass
  • Some buying pressure from those hoping the deal would fail, and
  • Some buying pressure from those hoping for a sweetened deal

Ignore, for now, the two positive influences on the share price and consider only the price as it reflects the original offer. The closing price today was 14.43, which the YTC Yield Calculator shows an annual quarterly yield-to-call of 12.94%. So, ignoring relatively minor tax effects, the dividend rate demanded by the market is about 13%, a far cry from the paltry 7.5% offered by the company.

The potential 7.5% coupon implies a price of 15.18 if the issue is to yield 12.94% … a modest improvement, but nowhere near the par value of 17.84.

But, you say, there will be two interim retractions allowed, in June 2016 and June 2018, totalling roughly 1/3 of the issue! Surely that’s worth something! And yes, you’re right … but it’s not clear whether the company will be entitled to pay that out with shares, and it still only applies to a third of the holdings. But, for the sake of an argument, let’s say that these interim retractions make up one-third of the discount, bringing the estimated value of the new shares to $16.07, still far below par.

But that’s not all, shrieks the late night infomercial of a press release! You also get a quarter of a warrant to buy DC.A subordinated voting stock at the low, low price of only $6.00 / share, effective until June 30, 2019. Surely that’s worth something! Well, yes, it is worth something, but not much. It’s only a quarter of a share, after all, so you’d have to make a profit of $1.77 x 4 [the estimated effective discount times 4] = $7.08 on each warrant to cover the current loss of value. This implies a future price of DC.A of 13.08, which I suggest is a very generous price target given today’s closing price of 5.95 [which has been boosted recently by the potential for massive profits on Dundee’s TauRx holding]. I will leave the matter for others better versed in option theory and Dundee’s prospects to value the option: I’ll just say that I don’t think it’s worth very much; that given the nature of Dundee’s prospects I don’t think it can be valued as normal option anyway; and that I think it’s a chrome-plated gizmo that has the intended purpose of confusing retail investors.

So, I recommend holders of DC.PR.C vote No to the deal and, as before, seriously consider exercising right of dissent. What we want is:

  • A Special Retraction Right allowing holders to cash out in June on the original terms [which may involve being paid in discounted DC.A shares]
  • an offered dividend rate that allows a reasonable prospect of the issue trading near par; at the moment, I estimate this at about 13%
  • a commitment from the company to maintain a credit rating from two major agencies until the retraction date of the issue

4 Responses to “DC.PR.C: Dundee Sweetens Exchange Offer … Still Abusive”

  1. SafetyinNumbers says:

    Is it fair to base the coupon that would allow the new issue to trade at par off of the other preferred which have clearly been sold off because of the turmoil surrounding the extension?

    DC.PR.B had a 7.7% yield the day before the extension announcement and has sold off on relatively low volume (as a % of shares outstanding) to yield 12%.

    I agree they should let people cash out as under the original terms if they choose but I do think based some reasonable YTM calculations the total package is worth significantly north of current prices.

  2. fed says:

    I must say all this has made me question my using Dundee as one of my high interest savings accounts. I would hate for them to change the terms of the ISA as well. I have pulled all my money out and put it into what seems to me a more reputable company.

  3. SafetyinNumbers says:

    Scotia bought Dundee Bank a while ago so you pulled your money from Scotia unless they started a new bank in the past year as I believe they had a non-compete.

  4. jiHymas says:

    Is it fair to base the coupon that would allow the new issue to trade at par off of the other preferred which have clearly been sold off because of the turmoil surrounding the extension?

    Fair? Fairness has nothing to do with it. Holders will attempt to maximize the coupon and issuers will attempt to minimize it; the only fairness I’m interested in is a free market, in which the original deal means something and I can walk away if I don’t like the new one.

    It may be that a sufficient number of investors will be willing to lock up their money with Dundee Corp. for an additional three years at 7.5%. Then they will do so, but what irks me about the situation is that in so doing they will also lock up other holder’s money for that same three years at that same price. It’s entirely legal and it has practical precedent, but it’s abusive.

    And I say that if the company has to resort to abusive tactics to establish their position, that’s an indicator that their position is otherwise indefensible.

    Fortunately, in this case their is some measure of protection for minority investors: a 10% dissent will scuttle the deal, as will a one-third-plus-one vote against.

    So far, the market agrees with me and the issue is trading below par; I cannot understand why anybody would vote to extend if the issue is expected to remain below par.

    So one point of view is that the offer is entirely fair and reasonable and 7.5% is a good market rate for Dundee to get preferred share financing for three years.

    Such a point of view may be right. It may be wrong. Pays yer money and takes yer chances.

    DC.PR.B had a 7.7% yield the day before the extension announcement

    Now there is additional information: the company has insufficient financial flexibility to meet this obligation comfortably, even when they’ve know it was coming for the last ten-odd years.

    I do think based some reasonable YTM calculations the total package is worth significantly north of current prices.

    Well, in that case you’ll probably vote yes. It takes two to make a market!

    I would hate for them to change the terms of the ISA as well.

    That would be considerably harder in any event, if not impossible, because your ISA is a demand deposit and as a bank deposit is protected by several layers of regulation.

    Strange things do happen in a bank-run situation and rules can change (as depositors in Northern Rock found; as depositors in Cyprus’ banks found), but it’s much, much harder and you have the authorities on your side … if for no other reason than the fact they’re on the hook for deposit insurance.

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