DC.PR.C: The Debate Continues

Niall McGee of the Globe was kind enough to quote me in his piece Daily Deals: Dundee sweetens preferreds offer and Canaccord hires bankers:

“Since launching our initial proposal, we have learned who our larger holders are and have sought input from a broader group in coming to our revised proposal,” David Goodman, chief executive officer of Dundee, said in an e-mail.

“We listened to the position of others and responded with a proposal that we believe is in everyone’s best interest.”

Preferred share fund manager James Hymas, president of Hymas Investment Management Inc., who didn’t care for the original offer, doesn’t like the revised offer much either – calling it “abusive” in a published note on his website, partly because of the omission of a “special retraction right” that allows shareholders to cash out under the original terms.

“Virtually every preferred share term extension voted on by shareholders provides for a special retraction right,” Mr. Hymas wrote.

“No such provision implies that the company is afraid of a mass retraction, which indicates that the company knows its offer is no good.”

Barry Critchley of the Financial Post has declared victory:

The people have spoken and the people, in this case holders of Series 4 preferred shares issued by Dundee Corp. who responded negatively to an initial proposal, have emerged victorious.

But they only won because Dundee listened and changed a plan that seemed destined to be shot down at a meeting originally scheduled for Jan. 7. Put it down as a victory for shareholders and common sense, a victory reflected by the market’s reaction: the prefs shares closed at $16.60 Thursday, up 15 per cent on the news.

“We have consulted and we responded with what we think is a win-win solution,” said David Goodman, chief executive of Dundee.

And I’ll also quote Sacha Peter of the Divestor blog. I don’t normally quote blog posts by those who are not market professionals … but Mr. Peter uses his own name, is a professional in another field [and therefore has something to lose if he says something stupid] and, most importantly, says nice things about me, so why not? His post is titled Dundee Corporation – DC.PR.C – Series 4 Preferred Shares – Amended Exchange Offer:

My own quick summary is: the deal stinks less compared to the original offer, but it still stinks.

By far and away the most important provision is the removal of the $0.223/share consent payment. This consent payment introduced the concept of a prisoner’s dilemma where if you believe the deal was going to pass, you would be incentivized to vote in favour of the deal despite how bad it was.

Without a prisoner’s dilemma, there is no incentive to voting yes for a marginal or mildly adverse offering (which was the only way the previous offering had any chance of passing).

This deal still stinks, but the removal of the $0.223/share carrot will remove votes in favour because (and this is my personal speculation) most of the shareholders are angling for the June 30, 2016 redemption.

Using Black-Scholes valuation (which is not the best way to value long-dated options, but is good enough for paper napkin purposes such as this post) we get an option value of $1.84/share, or about 46 cents per preferred share (as each share would receive a quarter warrant).

Using some more formal methods involves different results – if you are that bullish on Dundee’s common stock, why bother playing around with the preferred shares when you can simply buy the common shares or even the other preferred shares?

Preferred shareholders have an even easier decision this time around – vote against the offer. It is still terrible compared to the existing Series 4 preferred shares.

Today’s closing price of 16.60 allows us to estimate the packages total yield, ignoring the warrant value.

Analysis of DC.PR.C Yield
If Plan Succeeds
At Current Price of 16.60
Note: Faulty Analysis
Revised: see comments
Maturity Proportion of Shares Yield to Call
2016-6-30 15% 23.60%
2018-1-31 14.45% 11.41%
2019-6-30 70.55% 9.94%
Total 100% 12.20%

But, as stated in the title of the table, this analysis is wrong. Portfolio Yield is not the mean average of the yield of the individual securities, although it is usually presented this way as being close enough. In this particular case, the total portfolio cash flows are simple enough that we can calculate the Portfolio Yield from first principles, thus:

Date Face Value Cash Flow Div Cash Flow Rdpt Total Cash Flow
2016-01-07 -16.6
2016-03-31 17.84 0.3345 0 0.3345
2016-06-30 17.84 0.3345 2.676 3.0105
2016-09-30 15.164 0.284325 0 0.284325
2016-12-31 15.164 0.284325 0 0.284325
2017-03-31 15.164 0.284325 0 0.284325
2017-06-30 15.164 0.284325 0 0.284325
2017-09-30 15.164 0.284325 0 0.284325
2017-12-31 15.164 0.284325 0 0.284325
2018-01-31 15.164 0.094775 2.57788 2.672655
2018-03-31 12.58612 0.1573265 0 0.1573265
2018-06-30 12.58612 0.23598975 0 0.23598975
2018-09-30 12.58612 0.23598975 0 0.23598975
2018-09-30 12.58612 0.23598975 0 0.23598975
2018-12-31 12.58612 0.23598975 0 0.23598975
2019-03-31 12.58612 0.23598975 0 0.23598975
2019-06-30 12.58612 0.23598975 12.58612 12.82210975
XIRR 11.39%
Compounded Q’ly 10.94%

So that’s a bit of a difference, eh? An xlsx spreadsheet for the calculation is available: DCPRC_YieldAnalysis_160107 [Revised – see comments] and varying the price as it might be today allows us to construct the following chart:

Click for Big

So, from looking at this, and making a ballpark allowance for the value of the warrants which I don’t want and are only offered to provide a little bit of flim-flam for advisors eager to collect their unconscionable proxy-solicitation fees, I’d say that the coupon needs to be 10% or so for the package to trade at par, based on today’s market reaction [in which 67,625 shares traded, mostly at a very steady price of 16.60 and a VWAP of 16.55. This was good volume and a steady price!].

So, I will reiterate my previous recommendation, with a slight alteration to the desired coupon:

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% 11% to 12%
  • a commitment from the company to maintain a credit rating from two major agencies until the retraction date of the issue

2 Responses to “DC.PR.C: The Debate Continues”

  1. gokou3 says:

    Thanks for the write-up. I am a holder of the series 4 and thought the amended offer was pretty decent until I read your articles.

    Just wanted to point out a slight arithmetic error in your XIRR spreadsheet. The Jan. 2018 redemption is for 17% of the *then-outstanding* shares. Assuming 15% was redeemed in June 2016, 0.17*0.85 = 14.5% of the original O/S will be redeemed in Jan 2018. This would reduce the XIRR close to 10% even. Of course you implicitly assumed a $0 value for the warrants so on a net basis it may be a wash.

  2. jiHymas says:

    The Jan. 2018 redemption is for 17% of the *then-outstanding* shares.

    Oops! You are quite right. I have revised the two tables, the chart and the spreadsheet.

    Of course you implicitly assumed a $0 value for the warrants so on a net basis it may be a wash.

    That’s what I sort-of assume. If you assign a value to the warrants, you can subtract that from the current price [which is the value of the new preferreds and the quarter-warrant together] and get a good estimate of the new-preferred yield from the chart; e.g., if we assume the warrants are worth $0.40 per preferred share [close to the Divestor estimate], then we can use a price of $16.60 – 0.40 = $16.20 for the value of the new preferred shares alone and read a yield of about 12% off the chart.

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