BEE PRC - Strategic Hotels Preferred Stock

[thepupil]

Has anyone else been accumulating these? I think it is a very interesting risk reward. The company has been put up for sale and and the 8.5% and 8.25% callable preferreds (BEE PRA BEE PRB and BEE PRC) trade around 23.25-23.75. (Just got filled at 23.20 on the B's; liquidity is not great in any of the three series).

 

These represent very expensive capital and I believe they will be called at 25.00 upon sale. Buyers today earn 7ish % gross from the call + however many quarters of outsized carry it takes to sell the company.

 

As far as credit risk you have 1.3B of mortgage and other debt in front of you, then around 300MM of preferred, then 1.8B of common equity cushion. The common valuation is supported by the private market value of trophy hotels ( which could fall apart of course, but I think its a pretty big cushion). 2.7B of gross undepreciated assets on the balance sheet to give you some idea of replacement cost.

 

I wanted to ask the board about risks in terms of how the preferred shareholders might get screwed here. The only thing I can think of is the acquirer attempts to use an inferior currency to cash to buy the preferred (like lower coupon preferred stock).

 

What am I missing? 7% + 2%+ per quarter for what is very likely to be a short duration security seems very attractive in the context of all bonds, merger arb spreads, etc.

 

 

[thepupil]

Forgot to add some links to assist with due diligence

 

http://media.corporate-ir.net/media_files/IROL/17/176522/June%202013%20Investor%20Presentation%20vF.PDF

 

http://www.bloomberg.com/news/2013-06-20/strategic-hotels-turns-from-penny-stock-to-deal-target.html

 

http://www.marketwatch.com/story/orange-capital-llc-urges-immediate-sale-of-strategic-hotels-resorts-in-letter-sent-to-the-board-of-directors-2013-02-19

[Grenville]

Hi,

 

I read this article the other day in the WSJ and it's something to worry about. It may be the reason for the current discount in the shares.

 

Hotel Deal Sparks Feud Over Preferred Shares

http://online.wsj.com/article/SB10001424127887324049504578541603072663338.html

[thepupil]

That's very helpful and precisely the thing I am looking for in terms of finding what I am missing.

 

For what it is worth the B and C shares dividend rate increases to over 9% in the event a change of control causes the preferreds become unlisted  (prospectus : http://www.preferredstockchannel.com/symbol/?ticker=BEE.PRC&a=detailed)

 

I know of acquirers ceasing preferred dividends and basically using as PIK financing, but what I don't understand (in this particular situation) why that would be beneficial, unless you could funnel economic benefits to common shareholders in other ways besides dividends that bypass the preferreds seniority in the cap structure (like hefty management fees or something).  Barring something like that, I would think the dividends would accumulate and eventually the preferreds would have board representation (after 6 q's of unpaid) and own a big portion of the equity.

[Grenville]

I was curious since I once owned the BEE prefferreds. Check out this document on the former Equity Inn Preferred which is now unlisted Grace preferred.

 

http://www.snl.com/Cache/1500048147.PDF?Y=&O=PDF&D=&fid=1500048147&T=&iid=103147

 

I found it here:

http://www.equityinns.com