You may have noticed a whole lot of SEC filings yesterday regarding The Howard Hughes Corp. (NYSE:HHC). Here is what happened.
CIC and Brookfield Asset Management exercised their warrants. So, they collectively added 1.5 million shares of common stock. Now, how did they pay for it?
According to HHC's Schedule 13D report (PDF file):
Item 3. Source and Amount of Funds or Other Consideration
The first paragraph of Item 3 is hereby amended in its entirety as follows:
Each of Stable and Best directly hold, and by virtue of being the parent of CIC International Co., Ltd. (“CIC International”), which is the parent of Stable and Best, CIC indirectly holds, an ownership interest in Brookfield Retail Holdings III LLC (“BRH III”), one of the entities listed below (each, an “Investment Vehicle”), which entitles them to certain voting rights with respect to the Common Stock held by all of the Investment Vehicles. Therefore, the Reporting Persons may be deemed to share beneficial ownership of such securities. See Items 4 and 5.
Item 3 of the Schedule 13D is further hereby amended to include the following:
On November 9, 2012, pursuant to the terms of a Warrant Purchase Agreement (as described in Item 4), the Investment Vehicles acquired shares of Common Stock pursuant to the exercise of certain Warrants held by the Investment Vehicles. The source of funds used to pay the exercise prices for the Warrants was the proceeds received by the Investment Vehicles as consideration from a sale of the unexercised Warrants held by them to the Company. Each of (i) the number of Warrants exercised for shares of Common Stock and (ii) the number of Warrants sold to the Company by each Investment Vehicle along with the proceeds received by such Investment Vehicle in exchange for the sale such Warrants is set forth in Item 4.
Item 4. Purpose of the Transaction
Item 4 of the Original Schedule 13D is hereby amended to include the following:
On November 9, 2012, the Investment Vehicles entered into an agreement (the “Warrant Purchase Agreement”) with the Company pursuant to which each Investment Vehicle (i) exercised certain of the Warrants beneficially owned by it for shares of Common Stock and (ii) sold the remaining unexercised Warrants beneficially held by it to the Company in exchange for the consideration set forth below. The number of Warrants exercised by each Investment Vehicle and the number of Warrants sold to the Company by each Investment Vehicle along with the aggregate sale prices with respect to such Warrants sold are set forth in the tables below.
Do you follow? In order to pay for the exercising of the warrants, they sold warrants representing 2.3 million shares of HHC to HHC. That means HHC effectively took 2.3 million shares off the market.
Here is the best part: If we do a little math, 2.3 million shares divided by the $89 million sales price gives us a price of $38/share for the repurchase. They effectively bought back 2.3 million shares at 55% of the current market price. That's just fantastic...
Why would CIC/BAM do this? Well, if they exercised the warrants and sold them, they'd only get the difference between $50 and the current price (they also wanted to stay below 10% ownership). So it was a win/win for both sides.
But for shareholders this is simply wonderful.