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I recently wrote an article on CapLease's (NYSE:LSE) merger with American Realty Capital Properties (NASDAQ:ARCP) in which an interesting point was made within the comment stream (the comment stream often has significant value and is always worth the read) about the REIT's ability to redeem the preferred stock.

By way of background, on May 28th, CapLease announced it would be acquired by American Realty Capital Properties. Within the press release, they stated:

ARCP will pay an amount in cash equal to $8.50 per share for each outstanding share of Company common stock, and each share of Series A, Series B and Series C preferred stock of the Company will be converted into the right to receive the sum of $25.00 in cash plus an amount equal to any accrued and unpaid dividends up to but excluding the closing date of the Merger.

According to the press release, the preferred stock is going to be redeemed at par upon the closing of the transaction. A summary of the preferred stock is:

Series ASeries BSeries C
Coupon8.125%8.375%7.250%
Redemption Date7/22/134/19/171/25/18
Par$25$25$25
Current Price$25.48$25.75$25.60

Given that the Series B and Series C are not yet redeemable, the company must be relying on the "Change of Control" language in the prospectus' which states:

Upon the occurrence of a Change of Control (as defined below), we may, at our option, redeem the Series C Preferred Stock, in whole or in part within 120 days after the first date on which such Change of Control occurred, by paying $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date of redemption. We refer to this redemption as a "special optional redemption."

From the Series B prospectus, "Change of Control" (a defined term) states:

A "Change of Control" is when, after the original issuance of the Series B preferred stock, the following have occurred and are continuing:

  • the acquisition by any person, including any syndicate or group deemed to be a "person" under Section 13(d)(3) of the Exchange Act of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions of shares of our company entitling that person to exercise more than 50% of the total voting power of all shares of our company entitled to vote generally in elections of directors (except that such person will be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition); and
  • following the closing of any transaction referred to in the bullet point above, neither we nor the acquiring or surviving entity has a class of common securities (or ADRs representing such securities) listed on the NYSE, the NYSE Amex or NASDAQ or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE Amex or NASDAQ.

From the Series C prospectus:

A "Change of Control" is when, after the original issuance of the Series C Preferred Stock, the following have occurred and are continuing:

  • the acquisition by any person, including any syndicate or group deemed to be a "person" under Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions of shares of our company entitling that person to exercise more than 50% of the total voting power of all shares of our company entitled to vote generally in elections of directors (except that such person will be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition); and
  • following the closing of any transaction referred to in the bullet point above, neither we nor the acquiring or surviving entity has a class of common securities (or American Depositary Receipts ("ADRs") representing such securities) listed on the NYSE, the NYSE MKT (the "NYSE MKT") or the NASDAQ Stock Market ("NASDAQ") or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE MKT or NASDAQ.

Reading the language of what qualifies as a change of control, it appears that the conditions required for a change of control special optional redemption have not been met. Should this be the case, the preferred stock (Series B and C) cannot be redeemed until their optional redemption date (which is stated above).

Keep in mind that the preferred stock (Series B and C, specifically) dropped over $2 when the merger and redemption were announced. If the Series B and C preferred stock is not eligible for a special optional redemption, there should be an increase in the price to bring them back to market levels.

The company has not shared how the special optional redemption has been triggered, but if it has, in fact, been triggered, I would suspect that they will use the following from the merger agreement:

THIS AGREEMENT AND PLAN OF MERGER, dated as of May 28, 2013 (this "Agreement"), is made by and among American Realty Capital Properties, Inc., a Maryland corporation ("Parent"), ARC Properties Operating Partnership, L.P., a Delaware limited partnership and the operating partnership of Parent (the "Parent Operating Partnership"), Safari Acquisition, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of Parent ("Merger Sub"), CapLease, Inc., a Maryland corporation (the "Company"), Caplease, LP, a Delaware limited partnership and the operating partnership of the Company (the "Company Operating Partnership"), and CLF OP General Partner LLC, a Delaware limited liability company, a direct wholly owned subsidiary of the Company and the sole general partner of the Company Operating Partnership (the "Company OP General Partner").

Is it possible to say that the company is being merged into "Safari Acquisition LLC" which has no class of common securities listed on the NYSE, the NYSE MKT or the Nasdaq stock market? I do not think it is likely, nor do I think it would hold up under legal scrutiny.

With this information as a backdrop into the situation, in part two of this article, we will look at potential opportunities in CapLease preferreds.

Source: CapLease Preferreds: The Devil In The Details (Part 1)

Additional 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 Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.