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Recently, Bank of America (BAC) announced that it was making progress on folding Merrill Lynch into the parent company nearly four years after acquiring the brokerage firm. The first thing I think of when thinking of a consolidation within a complex business structure is the same thing I think about when looking at a complex capital structure: structure arbitrage.

Bank of America has, through its structure and subsidiary assumption and/or guarantees (or lack thereof), given preferred investors opportunities to trade among and between the subsidiaries. The recent announcement of the simplifying of the business structure should help two areas of the business collapse - Bank of America and Merrill Lynch preferreds.

The preferred stocks of Bank of America and Merrill Lynch have traded differently based on the perceived viability of the business and the implied support. Here is a snapshot of the preferred complex:

(click to enlarge)

As the above shows, the preferred stock of Merrill Lynch trades cheap to the preferred stock of Bank of America. Of the Bank of America/Merrill Lynch complex, my top pick is the Merrill Lynch capital trust III or MERPrP.

The Merrill Ps have a current yield of 7.27% and, importantly, a yield-to-call of 7.22% (the issue is currently redeemable). While the issue does not have the highest yield-to-call, it is positive and we are focused on the current yield, stripped yield (the yield at the price with accrued stripped out) and yield to maturity. All three of these metrics are greater than the average of the complex.

Obviously, it's not enough for there to be opportunity within a single name, that name has to have value relative to peers and other opportunities. In order to ascertain if the Merrill investment makes sense generally, we will look at it versus its global bank peers JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C):

(click to enlarge)

As the above table shows, the chosen preferred is also cheap to the preferred stocks of their peer group.

Bottom Line: The Bank of America (Merrill Lynch) 7.375% cumulative preferred stock is cheap to the Bank of America preferred complex as well as the preferred stock of its peer group. As Merrill is folded into Bank of America, the Merrill Ps should adjust their price in order to reduce the yield to something closer to the Bank of America preferreds. The higher coupon on the preferred should also help manage the downside as rates rise. As a result of this analysis, I will be selling my position in BACPrH and buying the BAC Ps.

Source: Bank Of America - 7% Plus Upside

Additional disclosure: Also long Merrill Hs. 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.