MPG Office Trust's (MPG) portfolio consists of high-end, Class A office space primarily located in Downtown Los Angeles. Encumbered with high leverage and declining rental revenues, MPG has been forced to allow many of their properties to go into foreclosure. With little hope of recovering on its own, MPG has been looking to liquidate and today, this stressed seller found a buyer. This article will analyze the buyout from the perspective of MPG shareholders of both the common and Preferred A.
Under the terms of the agreement, a fund originated by Brookfield Office Properties (BPO) would buy MPG for $3.15 per share which represents a 21% premium over recent market pricing. Given the dire state of the company, it is nearly undeniable that being acquired would be beneficial to MPG shareholders. This portion of the agreement is straight forward and generally viewed as beneficial.
If we view the same purchase from the perspective of an MPG preferred stockholder, it becomes more interesting. Only by delving into the legal language of the 256 page Form 8K filed with the SEC can we find the true impact. Below, is a snippet detailing the tender offer.
"At the Effective Time, each share of 7.625% Series A Cumulative Redeemable Preferred Stock ("Company Preferred Shares") of the Company issued and outstanding shall be converted into, and canceled in exchange for one share of 7.625% Series A Cumulative Redeemable Preferred Stock, par value $.01 per share, of the Sub REIT with the rights, terms and conditions set forth in organizational documents of the Sub REIT (which provide for rights, terms and conditions substantially identical to those applicable to the Company Preferred Shares under the Company organizational documents); provided that if more than 66.6% of the Company Preferred Shares outstanding on the date of the Merger Agreement are tendered in the Tender Offer (as defined in the Merger Agreement), then Parent will have the right to convert at the Effective Time all remaining (i.e. not being tendered) Company Preferred Shares into cash in an amount per Company Preferred Share equal to the Offer Price, payable to the seller in cash, without interest, but only if such conversion complies with applicable law and the Company's charter in all respects at the time of conversion."
Essentially, each MPG preferred A shareholder will be given the choice to sell their share for $25 in cash or to receive an identical preferred share of the new Sub REIT. However, if at least 66.6% of shares are tendered, the remaining can also be tendered without permission of the holders. Now, in analyzing which decision to make, we must know what the value in each decision is. Clearly, the tender is worth $25, but how much is the new preferred share worth?
Well, It comes with the same 7.625% coupon and has a base value of $25. It seems to be approximately equivalent, but it is not. There are more intricate details in the 256 page document that show its true value.
"The Corporation agrees that any and all accrued but unpaid dividends (whether or not declared) with respect to the MPG Preferred Accrual (as defined in the charter of Sub REIT) for each share of Sub REIT Series A Preferred Stock shall be deemed accrued on each share of Series A Preferred Stock (the "Preferred Accrual")."
Dividends were suspended on the MPG preferred A with the last one being paid on 10/31/2008. Since this time, dividends have been accruing. Thus far, 18 quarters have accrued at a rate of $0.4766 each for total accrual of $8.57. In the language detailed in the agreement, the full amount of this accrual will transfer over to the new preferred shares which brings their total value to $33.57. This is a huge difference from the $25.00 tendered amount.
A third option also exists for holders of MPG-A. It currently trades at $28.06 so one could simply sell It in the open market. Below is a table detailing all the potential outcomes for the preferred shareholders
Sell in market
Accept Tender offer
Decline tender offer and get new preferred share
Decline tender offer but 66% accepted forcing you to accept tender offer
*Assuming BPO honors and pays the accrued dividend
One may look at this through the economic practice of game theory. It is immediately apparent that selling in the open market for $28.06/share is pareto superior to accepting the tender offer. Declining the tender offer is the best deal at $33.57 if and only if 2 conditions are met.
- At least 33.5% of shares decline such that you are not forced to take the $25.00
- BPO has intentions to pay the accrued dividend.
If all shareholders are informed and rational, condition 1 is a given as it could only be false if shareholders choose a pareto inferior option. In a rational world this would not happen. Condition 2, however, is an unknown risk that must be weighed against the bigger reward of the $33.57.
The game theory analysis determines only 2 viable options for holders of the Preferred A: to sell in the open market or to decline the tender offer. The former gives a guaranteed $28.06 (or whatever the price is when sold) while the latter yields a conditional $33.57. I would recommend investors weigh the risk and reward themselves to ascertain the correct choice. This buyout may also represent an opportunity for non-shareholders who wish to buy the preferred for the potential upside. The tender offer is scheduled to commence in early May so investors have a few days to make the right choice.
Disclosure: This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer.