Saj Karsan of BarelKarsan.com recently wrote about Urbana Corp (see his post here). I found his write-up compelling, so I decided to look deeper. I looked deeper, and agreed with Saj (hence disclosure below), but I noticed a strange phenomenon worth bringing up.
Urbana Corp’s capital structure currently includes two classes of shares:
- 10,000,000 “URB” Common Shares
- 69,600,000 ”URB.A” Non-Voting Class A Common Shares
The company explains the difference between these two classes of shares as such (emphasis added):
Rank
Except with respect to voting and conversion, each Common Share and each Non-Voting Class A Share have the same rights and are equal in all respects on a share-for-share basis.
Voting
… Each holder of Common Shares is entitled to one vote in respect of each Common Share held at such meetings. The holders of Non-Voting Class A Shares are not entitled to vote at such meetings other than as required by applicable law.
Dividends
Subject to the rights of the holders of the Preferred Shares, if any are issued, the holders of Common Shares and Non-Voting Class A Shares are entitled to dividends if, as and when declared by the directors of Urbana and rank equally with respect to priority and payment of dividends. All dividends which the directors may determine to declare and pay on the Common Shares outstanding or on the Non-Voting Class A Shares outstanding will be paid in equal amounts per share on both such classes without preference or distinction.
Take-over Bid Protection
The Non-Voting Class A Shares include take-over bid protective provisions, or “coattails”,which are summarized as follows. If an offer to purchase Common Shares must, by reason of applicable securities legislation or the requirements of any stock exchange on which theCommon Shares are listed, be made to all or substantially all holders of Common Shares, the holders of the Non-Voting Class A Shares shall have the right, after the 7th day after the offer was made, to convert each Non-Voting Class A Share into one Common Share. An election by a holder of Non-Voting Class A Shares to exercise such conversion right is also deemed to constitute an irrevocable election by the holder to have the resulting Common Shares deposited pursuant to the offer to purchase the Common Shares (subject to anywithdrawal rights) and to have the resulting Common Shares reconverted into Non-Voting Class A Shares if the offer to purchase Common Shares is abandoned, withdrawn or notcompleted in accordance with its terms. Such deemed election to reconvert into Non-Voting Class A Shares shall also apply to any resulting Common Shares that are withdrawn from the offer to purchase or that are not ultimately taken up and paid for under the offer.
There will be no right to convert the Non-Voting Class A Shares into Common Shares in the following cases:
(i) the offer to purchase Common Shares is not required under applicable securities legislation or the rules of a stock exchange on which Common Shares are then listed to be made to all or substantially all holders of Common Shares who are in a province of Canada to which the legislation applies; that is, the offer is an “exempt take-over bid” within themeaning of the foregoing securities legislation; or
(ii) an offer to purchase Non-Voting Class A Shares is made concurrently with the offer to purchase Common Shares and the two offers are identical in respect of price per share, percentage of outstanding shares for which the offer is made, and in all other material respects. The offer to purchase the Non-Voting Class A Shares must be unconditional, subject to the exception that the offer for the Non-Voting Class A Shares may contain a condition to the effect that the offeror not be required to take up and pay for Non-Voting Class A Shares tendered in response to the offer if no shares are purchased pursuant to the concurrent offer for the Common Shares; or
(iii) holders of more than fifty percent (50%) of the outstanding Common Shares certify to Urbana that they will not deposit such Common Shares to the offer. The articles of amendment of Urbana contain a definition of an offer giving rise to the conversion right, provide certain procedures to be followed in order to effect the conversion and provide that, upon any such offer, Urbana or the transfer agent shall communicate inwriting to the holders of Non-Voting Class A Shares the full details as to the offer and the mode of exercise of the conversion right.
Dissolution
Subject to the prior rights of the Preferred Shares, if any are issued, upon the liquidation, dissolution or winding up of Urbana or any other distribution of its assets among its shareholders for the purpose of winding up its affairs, the assets of Urbana available for payment or distribution will be paid or distributed to the holders of Common Shares and the holders of Non-Voting Class A Shares equally, on a share-for-share basis.
From the above, we see that the only difference between the two classes is for voting and conversion. Everything else is equal. There can be no value differential assigned to dividends/dissolution/etc, as the classes are equal in all other respects. The conversion rights are in favour of the Non-Voting Class A shares, whereas the voting rights are in favour of the regular Common shares.
The notable phenomenon is the difference in trading price between URB and URB.A. As of the time I am writing this (3/22), the Common “URB” shares are trading at $1.55, whereas the Non-Voting Class A “URB.A” shares are trading at $1.30. So, the market is implying a voting premium of an astonishing 19.23%! Yes, a voting premium exists, but this is significantly higher than what could reasonably justified.
One more interesting thing to note would be that the less liquid shares, URB, are higher than the more liquid shares, meaning that the market seems to be indicating that URB is overvalued relative to what it should be. I do not agree with this sentiment, for the reasons Saj presented.
One strategy would be to short “URB” and go long “URB.A”, taking a position that the spread between the two will tighten and become more rational in the future. I do not think this strategy is optimal, because this is limited to a 19.23% gain. Instead, the greater opportunity is for the shares (either URB or URB.A) to move to intrinsic value, which as of today is the NAV of ~$2.08, representing, for the URB shares a 34% upside, and on the URB.A shares a 60% upside.
Anyone interested in URB (and to be clear, you should be!), check out this research report.
Author Disclosure: Long Urbana Corp.
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