Brookfield Office Properties (NYSE:BPO) agreed to buy MPG Office Trust (NYSE:MPG-OLD) for $3.15 a share in cash. BPO is creating a new fund, DTLA Holdings, which will own BPO's existing downtown Los Angeles assets and all of the existing assets of MPG.
As part of the merger agreement, BPO will begin a tender offer for MPG's 7.625% Series A Cumulative Redeemable Preferred Stock at $25/shr in cash. Provided that 66.6% of the preferred shares are tendered, then DTLA Holdings will have the right to convert all remaining preferred shares into cash at the stated offer price. If they do not reach the 66.6% acceptance level, the shares will be exchanged for a new 7.625% Series A preferred stock of the sub REIT with terms substantially identical to those of the MPG preferred shares. The bottom line is the preferred holders should reject the proposed tender offer for the following reasons:
- At $25/shr, the preferred holders are giving up the $8.57/shr of dividends that have accrued since it was suspended in late 2008.
- By creating the sub REIT, BPO is attempting to cram down the preferred shares in the new capital structure. The preferred shares will continue to accrue any unpaid dividends. If BPO would have purchased MPG outright, the preferred shares would have been callable at par, plus accrued dividends.
- Eventually, if the sub REIT is liquidated and/or DTLA decides to pay a dividend to the common holders, the preferred A holders will be owed the unpaid dividends. It is very uncommon for a REIT structure not to pay any dividends.
- As part of the merger agreement, BPO is issuing 12.5% series B preferred, which are junior to the Series A. BPO management did not provide any color about the reasoning during the investor call or whom the preferred is being issued to. It does not make much sense given the size of the issue is only $125,000 and the rate is significantly higher than the 7.625% paid on the series A for only being one notch lower in capital structure. No dividends can be paid on the Ser B until all accrued dividends are paid on the Ser A.
- Former U.S. SEC attorney Willie Briscoe and the securities litigation firm Powers Taylor, LLP are investigating the merger agreement, which is a further sign the MPG preferred shareholders should not accept this proposal. For more information on the pending investigation go to WBriscoe@TheBriscoeLawFirm.com.
- The preferreds have been trading primarily between 26.85 - 28 on high volume since the announcement. Anyone who has bought at these levels will not be tendering at $25.
Preferred holders should be disappointed with BPO's low ball tender offer of $25, as they are owed over $33.50. BPO is trying to cram down the preferred holders and bury them in the new sub REIT capital structure. They should reject the tender offer and force BPO to counter with a higher offer, which should be no less than $32 for existing holders to accept the deal.
Disclosure: I am long MPG.PA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author of this article is affiliated with a firm that has a position in MPG.A referenced above. The 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.