Pricing discrepancy in PRISA capital structure

Promotora de Informaciones (PRISA) describes itself as world’s leading Spanish and Portuguese-language media group. The company gets most of it’s revenue’s from Spain, but it also has a sizable presence in Latin America. It’s heavily indebted and not doing very well. But that doesn’t matter a lot for the following idea: even a bankruptcy shouldn’t be a disaster, although It’s not a best case scenario.

PRISA has two different share classes: ordinary Class A shares and convertible non-voting Class B shares. The B shares are convertible to A shares at any time. From the prospectus:

Holders of Prisa Class B convertible non-voting shares may at any time give Prisa notice of their election to convert the shares into one Prisa Class A ordinary share for each Prisa Class B convertible non-voting share. Prisa’s board (or a duly authorized committee) will, within five business days following the end of each month, issue Prisa Class A ordinary shares in respect of the Prisa Class B convertible non-voting shares whose holders have elected conversion during that prior month. Prisa will register with the Mercantile Register all Prisa Class A ordinary shares issued upon conversion as soon as practicably possible before the end of the month in which the Prisa Class A ordinary shares are issued.

So logic would dictate that the price of the Class B shares is at least equal to the price of the Class A shares. The market is currently failing to recognize this with the PRIS ADR trading at $1.70 at the time of writing while the PRIS-B ADR is trading at $1.57: that’s an eight percent discount for a security that has at least an equal value. Both ADR’s contain four shares.

While this is already noteworthy the discrepancy is even bigger when you realize that the Class B shares are actually far better than the Class A shares. The Class B shares not only receive a dividend (7 Class A shares for 40 Class B shares), they will also be automatically converted to Class A shares in 2014. When the Class A shares are trading below €2.00 the conversion will be increased from 1:1 to a maximum of 1.33 A shares for every B share:

Any Prisa Class B convertible non-voting share still outstanding on the date that is 42 months after its issue date will automatically convert into one Prisa Class A ordinary share, without any action by the holder. In the event of automatic conversion, if the volume-weighted average price of Prisa Class A ordinary shares on the Spanish Continuous Market Exchange (Sistema de Interconexión Bursátil-Mercado Continuo) during the 20 consecutive trading days immediately preceding the conversion date, or the twenty-day trailing average, is below €2.00, then the conversion rate will be modified. In this event, the number of Prisa Class A ordinary shares into which each Prisa Class B convertible non-voting share will convert will be equal to a fraction (expressed as a decimal), the numerator of which will be €2.00 and the denominator of which will be the twenty-day trailing average, subject to a maximum conversion rate of 1.33 Prisa Class A ordinary shares per Prisa Class B convertible non-voting share. If the twenty-day trailing average is less than €2.00, Prisa may also choose to retain the 1:1 conversion ratio, in which case Prisa would pay a per share amount of cash equal to the difference between €2.00 and the twenty-day trailing average, subject to a maximum of €0.50 per Prisa Class B convertible non-voting share. The balance of the premium reserve in respect of the Prisa Class B convertible non-voting shares, if any, will be made available to pay the nominal value of the Prisa Class A ordinary shares to be issued in excess of the Prisa Class B convertible non-voting shares to be converted.

With the Class A shares currently trading at €0.335 in Madrid it seems quite probable that holders of Class B shares will not only receive a few years of dividend payments before the automatic conversion in 2014, but that they will also receive 1.33x Class A shares for every Class B share bought today. So I think it’s quite obvious why I think the current market pricing is just wrong, and I haven’t even mentioned yet that the Class B shares rank above the Class A shares in case of a liquidation. While a liquidation is probably not a disaster for a long/short trade it’s not the best outcome if it would mean that both classes go to zero.

In a liquidation of Prisa, the Prisa Class B convertible non-voting shares would be entitled to receive, on a preferential basis according to applicable law, their stated value per share, before any distribution is made to the holders of Prisa Class A ordinary shares. In the event that Prisa has, immediately prior to any liquidation, distributable profits or share premium reserves in respect of the Prisa Class B convertible non-voting shares, the holders of the Prisa Class B convertible non-voting shares would receive any unpaid minimum dividend, including any accumulated unpaid dividends from prior years, in respect of the prior and then current fiscal year.

Holding the Class B shares to maturity and hedging the exposure to PRISA with a short Class A position is a pretty decent idea, but it’s also possible to buy PRIS-B shares and convert them directly to Class A shares. Not only will you capture the price difference between the two share classes, you also receive the accumulated dividends. Based on the declining number of Class B outstanding and the increasing amount of Class A shares there are people who are doing this trade. Last month 12 million Class B shares were converted to 14.1 million Class A shares (the dividend is paid in Class A shares).

Both trades have one big risk: being able to maintain the short position in the Class A shares as a hedge. There aren’t a lot of shares available for shorting, and you are paying at the moment 5% annually for the borrow. If you lose your borrow you could be forced to buy-in at exactly the wrong time, or the borrow fee might go through the roof. Think this risk is significant, but at the same time it’s really the only risk you are taking here.

A bit of good news is that the short term arbitrageurs should both increase the supply of Class A shares available for borrow and increase the price of the Class B shares. It’s also good news for the people who are long PRISA: a lower amount of Class B shares outstanding means less dilution in the future.

Conclusion

The PRISA Class B shares have been relatively cheap ever since they were created, and I have had a long position in the Class B shares since 2011 (my worst investment ever). But with the spread between the two share classes at an historic low, and the automatic conversion only getting closer I couldn’t resist buying some PRIS-B shares. This time I’m not making the mistake of not hedging my long exposure though.

Disclosure

Short PRIS, Long PRIS-B

14 thoughts on “Pricing discrepancy in PRISA capital structure

  1. pietje

    Borrow @ +7% now for the ADS, +10% in Spain. And looks like the conversion is 0.05$/ADS and can take a while (http://www.prisa.com/uploads/ficheros/paginas/descargas/201110/descargas-conversion-notice-es.pdf). The risk of a recall seems very significant. Actually I wouldn’t be surprised if a short squeeze is exactly the reason why the opportunity exists in the first place. Shares are up 33% on no news the past two days. Looks very shady, what do you think your edge is here?

    In fact, I think the smartest thing might be to outsmart the arbitrageurs and short the class B share. It’s probably easy to borrow (IB has it at 2.8% afaik) and it wouldn’t surprise me if the stock drops back 30% in a couple of days / weeks.

    Reply
    1. Alpha Vulture Post author

      The Class B shares are currently trading with more than a full year of accrued dividends. It would take some time to convert them (think it’s done once a month), but you would get ~1.19x the amount of Class A shares for every Class B share if you convert at the end of this month. I would say that paying a $0.05 ADS conversion fee isn’t really a problem to make that trade work.

      About the borrow, maybe you can check the following for me: I’m wondering what percentage of the float is currently sold short, if you check the statistics for PRIS on Yahoo there doesn’t seem to be a huge short interest in the stock, so doubt that a short squeeze explains the trading this week. I also checked the borrow rates, and don’t see it trending higher if we can believe IB. The PRIS B shares have been a bit below 7% this year, and the borrow fee in Spain is actually dropping from ~10% to ~5% the past two days.

      Reply
  2. pietje

    ADR borrow is still 7+% with only 0 – 15k shares available. Looks highly suspect. And the borrowing and lending market in Spain is pretty much a farce. Also, if you convert now I don’t think you get the dividend nor the extra shares (not sure about that one, but if I read the conversion instructions it looks like it is just 1:1).

    This idea was posted on VIC and SeekingAlpha so there are some (semi) intelligent people looking at it. Ask yourself: 1) what are possible reasons for the 30% runup in 2 days? 2) why is nobody else doing it? I don’t think you have any superior insights. A squeeze fits the picture pretty good and unless you can ‘spot the fish’ I’d be highly sceptical.

    Would be cool if you can make this work though, especially the conversion, keep us posted.

    Reply
    1. Alpha Vulture Post author

      I’m very sure that if you convert now you will get the dividend (but nothing more). Not only is this stated in the prospectus that accrued dividends will be paid when you convert, you can also see it if you check the results of the latest conversion: 12M Class B shares were converted to 14.1M Class A shares. That’s correct since it’s exactly one year in accrued dividend at a 17.5% yield.

      Possible answers for your questions:

      1) Price is going up because someone is buying a lot of shares. It can be that simple. I don’t see a lot of proof for a short squeeze thesis. Trading volume in the Class A shares has been massive, especially in Madrid, while there isn’t a lot of action in the Class B shares. If people would be squeezed out of a long/short position I think you should see more selling of Class B shares. Also, if you can trust the info from Yahoo there are just 1M Class A ADR shares short. That’s nothing compared to the recent trading volume in Madrid, and if the borrowing and lending market in Spain is a farce it’s probably a safe bet to assume that there aren’t many short located there.

      2) There are people doing this. Why do you think the number of Class B shares outstanding has declined from 400M to 350M? But it’s obviously not easy because of how hard it is to borrow Class A shares.

      About the fish question: there are obvious a lot of fishy investors active in this name. Every single person who is long the Class A shares is a massive idiot. So should we expect rational trading in the Class B shares?

      Another possibility: maybe Whitney Tilson is selling his position? He owns 1.6M Class B shares, and he did reduce his position when he last reported. But certainly could also be the case that he simply converted some shares since he also owned some class A shares at that time. But both cases are a good explanation for me: either he could be a seller, or he could be someone that is exploiting this opportunity.

      PS. Conversion if unfortunately for me not an option. IB is only willing to do that if you want to convert $1 million or more worth of shares at the same time. So I’ll need to hold this position until the automatic conversion in May 2014. That should generate 29 months of dividends at 17.5% => 42.3%. You can cover a pretty high borrow fee with that (and you obv. also have the possible 1.33x conversion at maturity).

      Reply
        1. Alpha Vulture Post author

          Not quite sure what you are asking. IB is my broker, so I buy through IB, and that’s why the 1MM restriction applies to me. It’s probably different (higher…) at other brokers.

          Reply
  3. Josh

    Right now you are buying the ADR and cannot convert (if I understood correctly before) unless you have a 1MM+ position. Can you buy direct (the non-ADR) to get around the 1MM+ position restriction so you can convert and just arb? I tried to find the direct but could not find it (although I only looked for a minute or two).

    Reply
  4. rich973

    I just got a message from TDAmeritrade. Seems to me they think I’m a fool, and they are offering to rip me off! Anybody wish to correct me and tell me why anyone would want to accept their offer?

    —–

    Dear valued client,

    The voluntary conversion period for Promotora De Informaciones Class B ADS shares (CUSIP 74343G303) will expire on April 30, 2014. On May 1, 2014, any remaining outstanding Class B shares will be subject to a mandatory conversion. The terms for the mandatory conversion have not yet been defined. As an alternative, holders may voluntarily convert their Class B ADS shares into Class A ADS shares.

    The terms of the ADS conversion are as follows: Holders will receive 1 Class A ADS (Cusip 74343G204) per share surrendered. There is an ADS cancellation fee of $0.05 for each Class B share converted into a Class A ADS share (rounded up to the nearest 100 shares).

    There are no withdrawal privileges afforded this offer.

    The TD Ameritrade Clearing deadline for participating in this offer is April 28, 2014. It is imperative that we receive your instructions to participate prior to this deadline. Any instructions received after this deadline will be processed on a best-efforts basis.

    Since the above offer is non-obligatory, if you wish to participate, you may submit instructions securely through the Message Center by following the steps below:

    – Under the “Home” tab; Click “Message Center”.
    – Click “Compose”
    – Enter your name, and then click “Choose a Topic.”
    – Select “Reorganization and Dividends.”
    – Click “Inquire About.”
    – Select “Participation Offer.”
    – Select the appropriate offer type.
    – Please ensure you provide clear instructions in the “Action You Wish to Take” comment box.
    – Review the section for Offer Agreement and mark “I agree” box.

    For security reasons, we cannot accept participation instructions that originate from a source other than the secure Message Center. You may also call a representative with the Corporate Actions Department at 888-723-8504, option 1. Specialists are available Monday through Friday, from 9 a.m. to 5:30 p.m. ET (excluding market holidays).

    The fee for participating in this offer is $38.00. This fee is waived for APEX accounts.

    Sincerely,

    TD Ameritrade Clearing

    Reply
    1. Alpha Vulture Post author

      Participating in the voluntary conversion would be pretty stupid because you wouldn’t be entitled to the adjusted 1.33x conversion rate that will apply with the mandatory conversion.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *