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Untying the Knots: Simplifying Corporate Actions

31 May 2022 Madhu Ramu

Understanding the impact of corporate actions is necessary when contemplating the right investment strategy. This impact is driven by timely awareness, accuracy, and attention to detail. In this blog, S&P's Global Corporate Action team will discuss some of the most dominant corporate actions announced each month and the roles they take in the marketplace.

What's with all the "Go-Shops"?

In the last few months of 2022, several big-name acquisitions have been announced throughout the industry. One of the more common features found amongst these M&A transactions have been what is referred to as a "go-shop" period. In theory, a go-shop element allows the target company a certain amount of time to seek out competing offers even after receiving a purchase offer from the acquirer.

History shows that such an element has no clear M&A target audience or deal size. For example, we saw the feature tied to an offer as small as the Corning Natural Gas and Argo Infrastructure Partners merger valued at USD 150 million in January 2021 to as large as one of the most recent activations by Broadcom with VMware in the USD 61 billion-dollar deal. Along with the hefty recent Broadcom and VMware announcement in May 2022 is the Preferred Apartment Communities and Blackstone Real Estate Income Trust announced in February 2022, valued at approximately USD 5.8 billion. So, if it's not size… then what is (if any) a common denominator for these "go-shop" offers?

Let's dive into the 2022 deals, shall we?

In February 2022, Preferred Apartment Communities (PAC) announced its entrance into a definitive agreement with Blackstone Real Estate Income Trust (Blackstone), whereby Blackstone will acquire all outstanding shares of common stock of PAC for USD 25 in an all-cash transaction. Now, over the past decade, Blackstone has relentlessly expanded its reach in real estate and has been dubbed as the world's largest commercial real estate company [1]; no surprise here after you realize the buildings the fund controls: The Cosmopolitan and Bellagio hotels on the Las Vegas Strip; Stuyvesant Town, the largest apartment complex in Manhattan; and the Embassy Office Parks in Bangalore, one of India's most prominent destinations for I.T. tenants. And they aren't slowing down anytime soon, as clearly seen with the PAC merger, which will ultimately give Blackstone 44 high-quality multifamily communities totaling approximately 12,000 units, and 54 grocery-anchored retail assets. It will also buy the Company's two Sun Belt office properties and ten mezzanine / preferred equity investments collateralized under construction and newly built multifamily assets [2]. Oh, and one more thing to note. Did we mention that they also agreed to acquire PS Business Parks, American Campus Communities, and Resource REIT in 2022?

Drawing our focus back to the PAC/Blackstone deal, Blackstone gave PAC about one month's worth of a go-shop period, from February 16 to March 18, 2022, to determine if there were any other deals it wished to pursue. Upon the expiration of the go-shop period, the Board of Directors did not determine any other potentially beneficial offer that superseded the Blackstone offer and is therefore encouraging all shareholders to approve the merger agreement.

Moving onto the Broadcom and VMware offer, it might not be so shocking to find a similar story at hand. Broadcom is already one of the leading semiconductor and infrastructure software solutions technology companies. They are now seeking to establish a more substantial presence in the cloud computing market. Similar to Blackstone, Broadcom is also notorious for its taste in acquirements. Within the last decade, Broadcom has completed the:

  • Acquisition of LSI Corp for USD 6.6 Billion (storage chipmaker);
  • Acquisition of Broadcom for USD 37 Billion and rebranding;
  • Acquisition of Brocade Communications System for USD 5.9 Billion (network gear maker);
  • Acquisition of C.A. Technologies Inc for USD 18.9 Billion (software);
  • Acquisition of Symantec Corp's security division for USD 10.7 Billion (software).

Our experts couldn't help but notice that the other "go-shop" merger agreements also came from heavy-acquiring hitters, including [3]:

  • Take-Two Interactive, making their Zynga Inc. merger transaction their 39th Company to acquire.
  • Berkshire Hathaway looking to acquire Alleghany Corp. as their 55th Company.
  • Thoma Bravo looking to acquire SailPoint Technologies Holdings, Inc in their 59th Company.

So, what's it all mean?

Well, to attempt to determine an outcome ruling on Merger transactions with a go-shop feature might be a bit of a stretch since all acquisitions, go-shop or not, are reliant on several different elements that can sway a result. However, the use can be correlated to the acquiring Company's relationship with acquisitions as a whole. It's clear that it isn't these companies' first rodeo in acquiring and expanding. So "go ahead, look for another offer… won't phase us" might be what the go-shop feature ultimately indicates by these acquiring giants.

PRE- versus DEF-: Does it matter?

In the realm of Corporate Actions, most investors understand the critical difference between an announcement that is considered preliminary versus definitive. Such a distinction can have an effect on the simplest of events, like a Cash Dividend, to the most complex of events like that of a Tender or Exchange Offer. That said, the factor between preliminary and definitive might be most crucial and dangerous to Special Purpose Acquisition Company (SPAC) announcements.

Since 2018, SPACs have been the talk of the town in the North American market and continue to stretch their global reach. Sometimes called "Blank Check Companies", "Blind Pool Companies," or "Target Acquisition Companies", SPACs are publicly traded securities whose primary purpose is to buy out another company (in most cases, within a designated industry). From the very start, preliminary versus definitive matters. When an issuer of a SPAC file for the listing of the unit, they initially provide a preliminary prospectus disclosing the terms of the units along with a breakdown of the components. Our experts know that the ratio of how many shares, warrants, and/or rights can change until the definitive prospectus is released, sometimes only a few days before the IPO date. Strike one.

The next and probably most important component of a SPAC is the identification of a company to take over, also known as the Business Combination. Every SPAC has written into its initial charter that the announcement of a Business Combination allows all shareholders cash-out feature, what the issuer defines as a "Redemption Right" or a "Conversion Right". By default, this cash-out feature becomes exercisable as soon as the Meeting Date to vote on the combination is announced and confirmed.

To this day, custodians and vendors have no consistency with such an announcement. Instead, they create various event types such as Tenders, Conversions, Redemptions, Reorganizations, Name Changes, or Mergers… all in hopes of getting the real message across. Strike two.

Well, what are the effects in real life?

Let's take PMV Consumer Acquisitions Corp.'s "Corporate Action Notice Clarification" post on June 10 as an example. On May 13, 2022, PMV Consumer Acquisition Corp. filed at PRE-14 A notifying holders of a special meeting to all stockholders requesting an extension amendment to extend the date whereby the Company has to consummate a business combination. There was not much to it, especially considering the notice was a preliminary filing.

About a month later, PMV posted a clarification notice to the marketplace stating that:

"the Company has not yet filed its definitive proxy statement." PMV continued their notice by stating, "The Company has been advised that DTC, inadvertently, and without the knowledge of the Company or its transfer agent, Continental Stock Transfer & Trust, issued a notice to stockholders of a voluntary corporate action to redeem [4]."

It became evident via the stock price fluctuation starting from May 13 to June 14, as well as the numerous inquiries the S&P Managed Corporate Actions Team received, that the invalid option to redeem shares was taking its toll on company proceedings. Our team worked on endless client clarification questions to ensure a complete understanding and explanation were provided. Finally, upon direct notice by the Company as well as our subject matter experts' explicit communication, stockholders' rights to redemption will not be exercisable until the Company provides formal notice of a rescheduled meeting date.

The Rise of Promissory Notes in Spain

Experts in the world of corporate actions know all too well that it's never truly safe to entirely depend on years of history or even common market practice to determine an explicit market trend. Just when you think you've cracked the code on a particular event structure in a specific country, Issuers and Exchanges in that location take you for a spin and throw a wrench in your assumed logic. One most recent truth to this story can be seen in dividend distributions by Spanish-Incorporated companies in 2022.

In the mid-2000s, the industry was first aware of a 'Bonus Rights Issue' (BRI) corporate action event and its heavy use in the Spanish market. By simply dissecting the name at hand, one can understand that the event is similar to a Bonus Issue, but with Rights first issued instead. Following the Rights Distribution, shareholders can choose to exercise their Bonus Rights into new securities without any cost orreceive cash instead from the sale of the Right to the Company at a fixed price. This latter option makes BRI events in Spain so much different from the rest of the globe and has also effectively helped them reduce cash payments while allowing holders to choose their tax effect [5].

What are we seeing now?

In the last month, S&P's Managed Corporate Actions Team has found a rise in the amount of straight Dividend with Option records declared by Spanish Issuers, whereby one of the valid options presented is to elect to receive the dividend distribution in the form of "promissory notes." By definition, a promissory note is a legal instrument whereby the issuing party promises in writing to pay a determinate sum of money to the payee. Taking it a step further, it was also noticed that such technicalities are presented by issuers under the Spanish REIT regime, known as the Sociedad Anónima Cotizada de Inversión en el Mercado Inmobiliario, or SOCIMI.

Realistically, several key features are tied to making a SOCIMI, including listing and investment requirements. However, one of the most prominent features of a SOCIMI is its mandatory requirement to distribute cash distributions based on:

  • 80% of profits arising from rental income and ancillary activities;
  • 50% of profits from the disposal of qualifying assets or shares; and
  • 100% of profits arising from qualifying shares.

That's a lot of cash for a trust that is still part of a relatively newer sector in Spain [6]…

To date, we have found the Promissory Notes option activated by:

  1. Persepolis Investments SOCIMI SA
  2. Hispanotels Inversiones SOCIMI SA
  3. Numulae Gestion De Servicios SOCIMI SA

Whether this becomes a new trend has yet to be seen. But as custodians and vendors continue to attempt to "hard code" a distribution rule for dividends in Spain, the S&P Managed Corporate Actions Team continues to handle client concerns and questions related to the new distribution structure and event-level payments.

Interested in more? Please find:

Global Corporate Actions' April Postings

Global Corporate Actions' March Postings

Global Corporate Actions' February Postings

Global Corporate Actions' January Postings

Global Corporate Action's November Postings

Global Corporate Action's October Postings

Global Corporate Action's September Postings

Global Corporate Action's August Postings

Global Corporate Action's July Postings

Global Corporate Action's June Postings

Posted 31 May 2022 by Madhu Ramu, Managing Director, Corporate Actions, S&P Global Commodity Insights

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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