It’s not the first of its kind but takeovers where the debenture holders are not offered full value is a worrying trend for those investors who believe in the hierarchy of liabilities – and the hierarchy of payouts.
We are referring to Monday’s announcement, where a group of Chinese investors plan to purchase all the shares and convertible debentures of Calgary-based Long Run Exploration. In a $770-million transaction, the buyers are offering $0.52 for each common share (a hefty premium) but only $750 per $1,000 face value for each debenture. While that offer also represents a healthy premium, it is not $1,000.
“The fact that equity holders are offered any value greater than zero implies the debenture holders should be paid in full. The debenture structure is not being respected,” noted one upset debenture holder, noting that, “at first blush this looks like a lousy deal for debenture holders.”
In the view of this debenture holder “it seems like an end around to get unknowing debenture holders to vote in favour and leave $250 on the table,” given that the terms being offered seem to be contrary to what was contained in the prospectus filed by Long Run in early 2014 for its $75 million, 6.40 per cent, five-year convertible debenture offering.
In that document, under the section Repurchase upon a Change of Control, this was said. “Within 30 days following the occurrence of a change of control, the corporation will be required to make a cash offer to purchase all of the debentures at a price equal to 100 per cent of the principal amount thereof plus accrued and unpaid interest thereon.” The section then goes on to define change of control, one part of which “an acquisition by a person or group of persons acting jointly or in concert.”
The offer is being done by way of a plan of arrangement and requires the support of holders of two-thirds of both classes of securities in separate votes. The meeting is expected to be held next February.
So what gives? Why aren’t the holders of the converts being offered par value and why is some of the value being taken away from the debenture holders and given to the equity holders?
Calls to Long Run seeking a comment weren’t returned.
One securities lawyer, not involved in the transaction, speculated that the approach adopted by the Chinese consortium is all part of “the art of the possible. To get a deal done the buyer has to satisfy two constituencies at a level that will get the requisite support of both groups.”
The solution: Offer the holders of both classes of securities a healthy premium, which increases their likelihood to tender. “It’s all part of getting it approved,” noted the lawyer, adding that in an insolvency situation (at some future date) the debenture holders may get even less.
Like any takeover, shareholders and debenture holders of Long Run are presumably hoping for more consideration. And in that regard they have some history in their side. In 2009, Canadian Royalties received an offer from Goldbrook Ventures and Jilin Jien Nickel for the shares and the convertible debentures.
The buyers offered $0.60 a share and $600 per $1,000 for each convertible debenture. Later the buyers upped the offer to $0.80 a share and $800 per $1,000 face value per debenture.