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CCG-A Campus Crest 8% Cumulative Preferred - Merger Arbitrage


BG2008
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http://www.sec.gov/Archives/edgar/data/1490983/000114420415069498/v426104_defm14a.htm#a_011

 

This one should be fairly easy to figure out

 

Harrison Street is buying Campus Crest in a $1.9 billion deal.  Harrison Street is a private equity firm that specialize in three real estate categories, Education, Healthcare, and Storage.  Harrison Street is also a JV in many of Campus Crest developments.  So Harrison Street knows what they are buying.  There are also scale synergies as Harrison Street already owns a collection of student housing assets.   

 

Earlier in 2015, Campus Crest turned off dividends on both the commons and the preferred when it considered strategic alternatives.  The back story is that the stock has underperformed for years and activists got involved.  Company got sold.  The prefers have been accruing dividends since Jan 15th at 8%.  At this writing, I believe that the accrued plus par is worth close to $26.8 to $26.9 while you can buy the preferred for $26.20-$26.25.  Deal closing will likely occur prior to March of 2016. Assuming end of Feb 2016 deal closing, you're looking at $27.25 in proceeds or a 4% spread and a 20% IRR in about 2-3 month time.  There is a spread of roughly the same size in the common as well that's about the same size.  But, I think the preferred is much safer. If the deal gets delayed for any reason, you continue to clip a 8% coupon. 

 

Deal Risk - Break up fee is less than I would like between $5-10mm depending on various factors.  Harrison Street was sued by a previous developer for backing out of a much smaller deal for not buying the buildings after they were developed.  Size of deal is large for Harrison Street. 

 

Paying for the deal

Equity - Various funds are providing a total of $927mm

Debt - PNC is providing up to $275mm, BOA is providing up to $475 pg 69 of proxy

 

Treatment of Preferred - Preferred will be redeemed pg 84

 

In Case Deal Breaks - I think there's possibly $3 of downside, but the security will not be impaired.  Owning the preferred means that you're creating the enterprise at a roughly 10% cap rate.  See pg 62.  The implied cap rate for the entirely company is roughly 6.5%.  Take away the $450mm of market cap, you get close to 10% cap rate for the preferred.  If the deal breaks, you get to own the preferred that accrues 8% per annum with a management team that wants to monetize the assets rather than build an empire. 

 

Insiders have bought $462k worth of the commons since the deal was announced.  This is rare and highly indicative of that the deal will go through. 

 

Why is the opportunity available - Merger Arb spreads have been wide this year.  But this is my favorite one and it's in a security that should not suffer impairment if the deal breaks in an asset class that I understand (real estate) 

 

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  • 3 weeks later...

Spread has tightened significantly since posting.  There was a healthy bid at $26.80.  The shares are trading at close to fair value.  Despite the ability to make another 1.5%, I've chosen to cash out and move onto the next opportunity.  I think that the investment is still fairly safe given where it sits on the capital structure.  The only thing that worries me is the small break up fee.  If the fees are larger, I may have continue to hold.     

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  • 2 weeks later...

Yeah, I think there are quite a bit of interesting names out there for arbs.  Now that CCG has traded down, it is certainly interesting again.  I may pick up some shares as well.  Look at RLD an BLT.  These sports fairly large spreads as well. 

 

RLD is the 3D glasses for movies.  They just had Star Wars which should be a huge near term positive for the underlining business.  BLT traded to about 2% from the take out price and then collapsed after the selloff.  The buyer in RLD makes sense.  I guess people are just concerned about who they are as they are more VC rather than PE or strategic.  But the buyer of RLD is paying a decent amount of break up fee.  BLT has a pretty big breakup fee as well. 

 

It makes senses to buy and trim as the spreads narrow and tighten on these names. 

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Sold out again. Deal is expected to close 'before the end of februari'. Spread is < 1%, buyer has backed out of deals before and this is not a bad time to own some spare cash. I don't expect it to drop down again but who knows .. Anyway, thanks for the idea. I'm funnelling some of the proceeds in a MEG/NXST spread. Interesting deal involving a CVR. You might like it.

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  • 1 month later...

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