Description

Since we are doing relative share arbs (see MWA/B) . . .

This is an interesting situation for a small to medium size long-short hedge fund or a risk averse individual investor. It is always interesting to find a disconnect across the capital structure. However, seldom do you find a big disconnect when one security has significantly more fundamental value than another and also trades at a discount. However, that is the case with the A and B common shares of Greif (GEF & GEF.B).

The B shares (GEF.B) trade at $51. The A shares (GEF) trade at $64. A shares are more liquid. Spread has historically been about $5-$6, now has blown out for some reason, probably the various hedge funds liquidating all over the place and creating nutty action. This one is different in that the B shares have SIGNIFICANTLY more value than the A shares.

1. B shares have all the voting power.
2. B shares get 1.5x the dividends of the A shares – GEF .38 per quarter, GEF.B .57 per quarter – this creates a significant positive carry for the long/short position and indicates that the B shares have significantly higher economic value.
3. Management/family owns 58% of B, almost none of A
4. This is important because: It appears that GEF.B may get 1.5x more than GEF in a SALE of the company, which makes sense given they get 1.5x more of the dividends – otherwise management/family could simply lever up the entire balance sheet, pay out a huge dividend to get 1.5x the A and  then just have the buyer purchase the company for nothing and pay off the debt.

We clarified point #4 in a discussion with GEF IR.They said nothing is written in stone regarding ownership rights between the class A and class B in an acquisition.  The guy said they always try and give the A shares as much ownership as the B’s in these cases but “nothing is written in stone.”  In an attempt to clarify this we asked, “So if Greif were acquired, the Class B could receive a bigger piece of the pie compared to the A shares” to which his answer was “yes.” 

It sounds like B shares would receive at minimum an equal payout in the case they get acquired.

Catalyst