PAY.PR.A to Purchase & Retire 10.8% of Issue

This is something both interesting and complicated – it would have to happen at month-end! PAY.PR.A announced today:

the final results of its modified Dutch auction-type substantial issuer bid to repurchase (the “Offer”) up to 300,000 of its preferred shares (TSX: “PAY.PR.A”) which expired at 5:00 p.m. (EST) on May 30, 2007

    Based on the final report provided by the depositary for the Offer, 224,644 preferred shares have been deposited and not withdrawn. Pursuant to the terms of the Offer, HIPAYS determined the purchase price to be $25.90 per preferred share (the “Purchase Price”) to put it in a position to take up the maximum number of preferred shares deposited to the Offer for an aggregate purchase amount of $5,818,279.60.
    All preferred shares properly deposited to the Offer at auction tender prices below the Purchase Price will be purchased at the Purchase Price. Payment to holders of preferred shares tendered and accepted for purchase will be made as soon as practicable, but otherwise in compliance with the Offer.
    The purchased preferred shares represent approximately 10.8% of the preferred shares outstanding as of May 30, 2007. After the purchase, approximately 1,860,752 preferred shares will remain outstanding.

According to the press release that announced the offer:

On July 31, 2008 (the “Termination Date”) the preferred shares will be redeemed for $25.00 and the remaining 15 distributions from the expiry of the Offer to the Termination Date will amount to $1.719. Accordingly, the yield to maturity of a preferred share at $25.50 to the Termination Date is 3.86% and the yield to maturity of a preferred share at $25.90 to the Termination Date is 2.57%.

Now, at first glance, this doesn’t seem to make much sense. Why would the company purchase its own prefs at a premium to par and at a lousy yield-to-maturity? 

I suspect the key may be found in my last comment on this issue:

As far as I can make out from the prospectus, the “Preferred Repayment Portfolio” will be delivered in its entirety to CIBC on the termination date in exchange for the amount due on maturity of the prefs. This is a bit of bad new for the Capital Unit Holders (because it means the current excess value of $3,901,000 will be lost), but the pref holders don’t care!

So I suspect that this is worthwhile for the Capital Unit Holders because they will now capture the excess value … or, at least, a fraction of it! I’m not sure about this, though, so confirmation or denial of this hypothesis is left as an exercise for the student.

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