PrefBlog

Assiduous Readers will remember that my post regarding the proposed RON.PR.A arrangement sparked a fair amount of comment – by PrefBlog standards – with several commenters expressing horror at the idea of a preferred share being taken out below par and heaping me with opprobrium for suggesting it was a pretty good deal for holders.

I based that opinion on a comparison with similar issues and reiterated that opinion when the grumblers got an ally.I’ll take the opportunity to update prices for that list one last time:

So the preferred share market has made a valiant effort to muddy the waters since the February 3 announcement date, but on the whole I’d say it has still come short.

Of the six comparators – chosen for having a ‘similar’ credit quality as will the issue when it’s part of Lowe’s and for having similar Issue Reset Spreads – three are trading in excess of $19.00. If they were all like that, I’d probably just throw up my hands and tell you to flip a coin. But if we look at these issues with a (tiny) bit more care, we see that the issues trading north of $19.00 are all banks, which continue to exhibit a decent funding advantage over non-banks in the Canadian preferred share market (this is discussed in PrefLetter). The three non-banks are trading at or below $18.00 and I suggest they are more indicative of where RON.PR.A might be expected to trade assuming that the common is acquired and the preferred isn’t. I will say additionally that adjustment to the new price might happen very swiftly if the Plan is rejected, since disappointed arbitrageurs will be dumping the stock, which will suddenly reset to a markedly lower dividend at the same time.

As noted in the March 9 update to the post about the grumblers’ ally, there were rumours that:

This week, and possibly as early as Thursday, more information is expected to be released about the extent of the opposition to the terms offered to the pref shareholders. “We have had lots of emails and calls from retail investors about the situation and we will be responding,” said an adviser with knowledge of what’s being planned.

All I can say is: I ain’t seen nuthin’ ’bout this t’ing.

What I have seen is some support from the regulatory parasites:

RONA inc. (TSX: RON, RON.PR.A) (“RONA” or the “Corporation”) is pleased to announce that leading advisory firm Glass, Lewis & Co., LLC (“Glass Lewis”) has recommended that common and preferred shareholders of RONA vote in favour of the previously announced statutory arrangement (the “Arrangement”) involving RONA and Lowe’s Companies, Inc. at the special meeting of common and preferred shareholders to be held on March 31, 2016 (the “Meeting”). The other leading advisory firm Institutional Shareholder Services Inc. (“ISS”) has also recommended that common shareholders of RONA vote in favour of the Arrangement at the Meeting. Per its policy, ISS does not make recommendations to preferred shareholders.

Under the statutory arrangement, holders of common shares of RONA will receive $24.00 in cash per share, representing a premium of 104% to the closing price of the common shares on the Toronto Stock Exchange (the “TSX”) on February 2, 2016, the day prior to the announcement of the Arrangement. Holders of preferred shares of RONA will receive $20.00 in cash per share, representing a premium of 59% to the closing price of the preferred shares on the TSX on February 2, 2016.

Glass Lewis has recommended that RONA common and preferred shareholders vote FOR the Arrangement, which allows common and preferred shareholders to cash out their investment and immediately realize an assured value at a substantial premium. In addition, Glass Lewis considers the price for preferred shares to be fair and attractive to preferred shareholders considering, among other factors, the limited liquidity of the preferred shares.

ISS has recommended that RONA common shareholders vote FOR the Arrangement for a number of reasons, including the substantial cash premium and the fact that RONA’s largest shareholder, Caisse de dépôt et placement du Québec, supports the Arrangement.

RONA shareholders are encouraged to read the Corporation’s management proxy circular with respect to the Arrangement which is available on SEDAR at www.sedar.com. The circular contains a detailed description of the Arrangement. RONA’s Board unanimously recommends that all RONA common and preferred shareholders vote FOR the Arrangement to be considered at the Meeting.

RONA shareholders are reminded to vote before the proxy cut-off time at 10:30 a.m. (Montreal Time) on Tuesday, March 29, 2016.

I’m not inclined to put too much weight on the Glass, Lewis recommendation. The quoted rationale is just a touch on the skimpy side and I have no intention of paying an extortionate price for the full report. I would not give Glass Lewis or ISS benefit of any doubt, either, because their business model is a joke. The only reason proxy advisory firms exist is because regulators insist that investment funds vote their shares with lots of written rationale. Ain’t nobody got time for that. Significant votes, such as acquisitions, or an attempted coup d’état by a respected activist firm, will be examined closely by Portfolio Managers, but most votes have historically been determined by the Wall Street Rule: If you like the company, vote with management. If you don’t like the company, sell the stock. End of story. But that’s not allowed any more, so the firms will happily pay the proxy advisory firms a bit of money to generate the required weight of paperwork for them, which will free up some time for application of more useful and sophisticated portfolio management techniques such as having lunch with clients.

So who cares, really, what Glass Lewis thinks? It simply doesn’t matter.

The only other thing I’ve seen is a post on the unsigned blog “Canadian Value Investing” titled Rona Merger Arbitrage: Heads I Win, Tails I Don’t Lose Much. Actually, the blog isn’t quite as unsigned as appears to be intended, because GoDaddy provides the following information:

Registrant Name: Nelson Smith
Registrant Organization:
Registrant Street: 414 14th Street East
Registrant City: Drumheller
Registrant State/Province: Alberta
Registrant Postal Code: T0J 0Y5
Registrant Country: CA
Registrant Phone: +1.4033345555
Registrant Phone Ext:
Registrant Fax:
Registrant Fax Ext:
Registrant Email: nsmith1983@gmail.com

It might be that Mr. Smith, if he exists at all, is merely an intermediary, but I suppose those in dire need of entertainment could follow up the clue. There is a Nelson Smith from Drumheller on LinkedIn with a consistent biography, for what that’s worth.

Anyway, the blog post suggests:

There are a number of reasons why people suspect a higher bid for the preferred shares are coming. Rona’s investor relations department is reportedly swamped with emails and phone calls from pissed off retail investors making a big stink about the whole situation.

According to at least two different articles I’ve read, insiders with a close knowledge of the situation say the two companies are working on some sort of alternative plan to make things right with the preferred shareholders.

I haven’t seen those articles – unless you count the Grumblers’ Ally and the Critchley column referenced therein – and Canadian Value Investing did not see fit to link them. Anyway, these mysterious stories are used to justify the investment thesis:

Say the deal closes on April 30th. Investors who buy today at $20.25 would get approximately $0.28 in dividends between now and the closing date, which pushes their cost down to $19.97 per share. If shareholders agree to the $20, you get your money back.

But if a higher offer comes, there’s potential for a maximum of 25% upside. Even a 10% upside would be spectacular over a period of a few weeks. You could then hold until the transaction date, saving yourself the commission on selling. That’s not much these days, but hey, every few bucks helps.

The market is clearly pricing in a higher offer coming for the preferreds, or else they’d be trading at a slight discount like the common shares. I’ll gladly take a shot at a 25% upside with very little risk to the downside. Worse case scenario I can see is I just get my money back.

There’s one rather important scenario missing from the list: No change to preferred plan, common is acquired, preferred isn’t, preferred trades like its comparables, which I suggest is something like 10% below $20. I suggest this scenario is the main alternative to an acquisition at $20, but hey … it takes two to make a market!

It should also be noted that there is a small, but finite chance that the common shareholders will reject the deal they are offered – in which case the credit quality of RON.PR.A returns to its prior state of ‘horrible’ and the trading price can be generously predicted to return to the low teens.

I don’t understand the rationale that might support a higher offer. The post suggests it is because of “emails and phone calls from pissed off retail investors making a big stink about the whole situation.” Now, in this day and age of governance by Internet meme it may well be that the Public Relations department is perturbed. But from a hard-headed point of view, who cares? RON.PR.A represents cheap financing, it is unlikely that Lowe’s will be issuing equity of any kind in Canada in the future, and the $34.5-million additional cost to acquire at par isn’t chump change.

I’ve been wrong before and I’ll be wrong again, but in this case I suggest that the rational course of action is to vote in favour of the Preferred Share Resolution. Be quick though, voting closes very soon! The safest course of action is, however, to sell on the market – the price is very close to $20 and such a sale would eliminate the potential for nasty consequences should either the common or preferred shareholders vote against their respective resolutions.

This entry was posted on Friday, March 25th, 2016 at 3:31 am and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.