{"id":31896,"date":"2016-01-08T01:53:14","date_gmt":"2016-01-08T06:53:14","guid":{"rendered":"http:\/\/prefblog.com\/?p=31896"},"modified":"2016-01-08T01:53:14","modified_gmt":"2016-01-08T06:53:14","slug":"dc-pr-c-the-debate-continues","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=31896","title":{"rendered":"DC.PR.C: The Debate Continues"},"content":{"rendered":"

Niall McGee of the Globe was kind enough to quote me in his piece Daily Deals: Dundee sweetens preferreds offer and Canaccord hires bankers<\/a>:<\/p>\n

\u201cSince 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,\u201d David Goodman, chief executive officer of Dundee, said in an e-mail.<\/p>\n

\u201cWe listened to the position of others and responded with a proposal that we believe is in everyone\u2019s best interest.\u201d
\n…<\/b>
\nPreferred share fund manager James Hymas, president of Hymas Investment Management Inc., who didn\u2019t care for the original offer, doesn\u2019t like the revised offer much either \u2013 calling it \u201cabusive\u201d in a published note on his website<\/a>, partly because of the omission of a \u201cspecial retraction right\u201d that allows shareholders to cash out under the original terms.<\/p>\n

\u201cVirtually every preferred share term extension voted on by shareholders provides for a special retraction right,\u201d Mr. Hymas wrote.<\/p>\n

\u201cNo such provision implies that the company is afraid of a mass retraction, which indicates that the company knows its offer is no good.\u201d<\/p><\/blockquote>\n

Barry Critchley of the Financial Post has declared victory<\/a>:<\/p>\n

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.<\/p>\n

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\u2019s reaction: the prefs shares closed at $16.60 Thursday, up 15 per cent on the news.<\/p>\n

\u201cWe have consulted and we responded with what we think is a win-win solution,\u201d said David Goodman, chief executive of Dundee.<\/p><\/blockquote>\n

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 \u2013 DC.PR.C \u2013 Series 4 Preferred Shares \u2013 Amended Exchange Offer<\/a>:<\/p>\n

My own quick summary is: the deal stinks less compared to the original offer, but it still stinks.
\n…<\/b>
\nBy 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\u2019s 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.<\/p>\n

Without a prisoner\u2019s 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).<\/p>\n

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.
\n…<\/b>
\nUsing 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).<\/p>\n

Using some more formal methods involves different results \u2013 if you are that bullish on Dundee\u2019s common stock, why bother playing around with the preferred shares when you can simply buy the common shares or even the other preferred shares?
\n…<\/b>
\nPreferred shareholders have an even easier decision this time around \u2013 vote against the offer. It is still terrible compared to the existing Series 4 preferred shares.<\/p><\/blockquote>\n

Today’s closing price of 16.60 allows us to estimate the packages total yield, ignoring the warrant value.<\/p>\n

\n\n\n\n\n\n\n\n\n
Analysis of DC.PR.C Yield
\nIf Plan Succeeds
\nAt Current Price of 16.60
\nNote: Faulty Analysis<\/b>
\nRevised: see comments<\/i><\/td>\n<\/tr>\n
Maturity<\/td>\nProportion of Shares<\/td>\nYield to Call<\/td>\n<\/tr>\n
2016-6-30<\/td>\n15%<\/td>\n23.60%<\/td>\n<\/tr>\n
2018-1-31<\/td>\n14.45%<\/td>\n11.41%<\/td>\n<\/tr>\n
2019-6-30<\/td>\n70.55%<\/td>\n9.94%<\/td>\n<\/tr>\n
Total<\/td>\n100%<\/td>\n12.20%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

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:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Date<\/td>\nFace Value<\/td>\nCash Flow Div<\/td>\nCash Flow Rdpt<\/td>\nTotal Cash Flow<\/td>\n<\/tr>\n
2016-01-07<\/td>\n<\/td>\n<\/td>\n<\/td>\n-16.6<\/td>\n<\/tr>\n
2016-03-31<\/td>\n17.84<\/td>\n0.3345<\/td>\n0<\/td>\n0.3345<\/td>\n<\/tr>\n
2016-06-30<\/td>\n17.84<\/td>\n0.3345<\/td>\n2.676<\/td>\n3.0105<\/td>\n<\/tr>\n
2016-09-30<\/td>\n15.164<\/td>\n0.284325<\/td>\n0<\/td>\n0.284325<\/td>\n<\/tr>\n
2016-12-31<\/td>\n15.164<\/td>\n0.284325<\/td>\n0<\/td>\n0.284325<\/td>\n<\/tr>\n
2017-03-31<\/td>\n15.164<\/td>\n0.284325<\/td>\n0<\/td>\n0.284325<\/td>\n<\/tr>\n
2017-06-30<\/td>\n15.164<\/td>\n0.284325<\/td>\n0<\/td>\n0.284325<\/td>\n<\/tr>\n
2017-09-30<\/td>\n15.164<\/td>\n0.284325<\/td>\n0<\/td>\n0.284325<\/td>\n<\/tr>\n
2017-12-31<\/td>\n15.164<\/td>\n0.284325<\/td>\n0<\/td>\n0.284325<\/td>\n<\/tr>\n
2018-01-31<\/td>\n15.164<\/td>\n0.094775<\/td>\n2.57788<\/td>\n2.672655<\/td>\n<\/tr>\n
2018-03-31<\/td>\n12.58612<\/td>\n0.1573265<\/td>\n0<\/td>\n0.1573265<\/td>\n<\/tr>\n
2018-06-30<\/td>\n12.58612<\/td>\n0.23598975<\/td>\n0<\/td>\n0.23598975<\/td>\n<\/tr>\n
2018-09-30<\/td>\n12.58612<\/td>\n0.23598975<\/td>\n0<\/td>\n0.23598975<\/td>\n<\/tr>\n
2018-09-30<\/td>\n12.58612<\/td>\n0.23598975<\/td>\n0<\/td>\n0.23598975<\/td>\n<\/tr>\n
2018-12-31<\/td>\n12.58612<\/td>\n0.23598975<\/td>\n0<\/td>\n0.23598975<\/td>\n<\/tr>\n
2019-03-31<\/td>\n12.58612<\/td>\n0.23598975<\/td>\n0<\/td>\n0.23598975<\/td>\n<\/tr>\n
2019-06-30<\/td>\n12.58612<\/td>\n0.23598975<\/td>\n12.58612<\/td>\n12.82210975<\/td>\n<\/tr>\n
<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n<\/td>\n<\/td>\nXIRR<\/td>\n11.39%<\/td>\n<\/tr>\n
<\/td>\n<\/td>\n<\/td>\nCompounded Q’ly<\/td>\n10.94%<\/td>\n<\/tr>\n<\/table>\n

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

\"DCPRC_PackageYield_varyPx_Rev\"<\/a>
\nClick for Big<\/i><\/div>\n

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!].<\/p>\n

So, I will reiterate my previous recommendation, with a slight alteration to the desired coupon:<\/p>\n

I recommend holders of DC.PR.C vote No<\/b> to the deal and, as before, seriously consider exercising right of dissent<\/a>. What we want is:<\/p>\n