Crawford & Company (the "Company"), an Atlanta-based provider of claims management solutions for the insurance industry, represents an arbitrage opportunity with enormous risk-free return potential. The Company has both an "A" share (NYSE: CRD.A) and a "B" share (NYSE: CRD.B). As of the close on Wednesday, February 20th, CRD-B traded at $8.00 or a 40% premium to CRD-A (which traded at $5.71). The shares are substantially the same with the exception of voting rights and dividends. The "B" shares have voting rights and the "A" shares do not. However, the "A" shares are entitled to a larger annual dividend than the "B" shares. The "A" shares receive $0.16 per share annually ($0.04 quarterly) or a 2.8% annual dividend yield while the "B" shares receive $0.12 per share annually ($0.03 quarterly) or a 1.5% annual dividend yield.
According to the Crawford & Company's latest annual report:
Shares of the Company's two classes of common stock are traded on the NYSE under the symbols CRDA and CRDB, respectively. The Company's two classes of stock are substantially identical, except with respect to voting rights and the Company's ability to pay greater cash dividends on the Class A Common Stock than on the Class B Common Stock, subject to certain limitations. In addition, with respect to mergers or similar transactions, holders of Class A Common Stock must receive the same type and amount of consideration as holders of Class B Common Stock, unless approved by the holders of 75% of the Class A Common Stock, voting as a class.
Because the Crawford family controls the Company, voting rights should be a non-issue. Because the "A" shares are entitled to larger dividends and have the same economic interest otherwise, there is no reason for this spread to exist. During the summer of 2012, this spread was largely non-existent. In fact, the week of August 6, 2012, the "A" share actually traded higher than the "B" share.
Therefore, it makes perfect sense to buy the "A" shares and short a corresponding number of "B" shares. Arbitrage at its finest.
Thank you Mr. Market for once again proving how inefficient you really are. I guess I'll pass on General Electric (NYSE: GE).
Disclosure: I am long CRD.A. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclosure: I am long CRD.A and short CRD.B as are the accounts that I manage.