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NM Preferred Holders Should Accept The Exchange Offer

|Includes: Navios Maritime Holdings Inc. (NM)

Navios Maritime (NYSE:NM) has recently announced an exchange offer expiring October 17, 2016 for the series G and H preferred stocks. They are offering $5.85/share for series G and $5.75/share for series H. Details here.

Many Seeking Alpha readers have commented that the offer is insultingly low and that they intend to ignore the offer. This is a bad idea and I will explain why. If you read the exchange offer details, the offer is conditional on at least 2/3 of the preferred holders of each series accepting. What this means is that if the exchange offer is successful, NM will be buying back at least 2/3 of each series. With a 2/3 majority, NM will be able to amend the terms of the preferred.

This situation reminds me of the Emmis Communications preferred. What EMMS essentially did was they issued additional preferred shares to their own controlled parties and used the additional preferred shares to dilute the votes of the public holders. In combination with this move they bought the votes of some large public preferred shareholders in side deals and with a 2/3 majority essentially voted to abolish all the economic rights of the preferred shares. This entire move was perfectly legal and was upheld in court in the subsequent shareholder lawsuit.

At this point you have to understand that if the exchange offer is successful, your economic rights as a preferred shareholder cannot be guaranteed. You will be at the mercy of Navios to not screw you over once they control 2/3 of the preferred votes. Let me draw a game theory table for you to illustrate this better.

Outcome of NM Preferred Exchange Offer
You get Offer Succeeds Offer Fails
You vote yes $5.85/share No change
You vote no screwed No change

Let's look at the payoff matrix for a minute. No matter what happens, voting yes is at least as good as voting no. Navios made the offer conditional on 2/3 acceptance precisely because this will be the payoff matrix facing shareholders.

So after you're done being insulted, think rationally about the payoff structure and vote accordingly.