Description

Hi, guys --20.48

Long RUSHB/Short RUSHA. Probably personal account only.

BACKGROUND 

Rush Enterprises, the nation's largest commercial truck dealer, has two classes of stock: A shares and B shares. From the proxy, "Each share of Class A common stock ranks substantially equal to each share of Class B common stock with respect to receipt of any dividends or distributions declared on shares of common stock and the right to receive proceeds on liquidation or dissolution of us after payment of our indebtedness and liquidation preference payments to holders of any preferred shares. However, holders of Class A common stock have 1/20th of one vote per share on all matters requiring a shareholder vote, while holders of Class B common stock have one full vote per share." So the B shares are worth more than A shares.

Yet I see that on Friday, RUSHA closed at $20.48, RUSHB at $17.06; A is 20% higher than B. This is to be understood, if it's understandable at all, as a liquidity/obscurity discount:

• A shares sound better than B shares. Like, I would totally take class A over class B every time -- right?
• I believe but have not confirmed that the A shares are represented in indices, etc., while the B shares are not.
• All the research and reporting I've seen on the company mentions only the A shares.
• There are ~2.5x as many A shares as B, and 38% of the B shares are owned by Marvin Rush, the company founder and chairman of the board.

The end result is that, according to Yahoo!, class A trades around 120K shares/day, class B only 10K -- which is why this is a PA idea, although it might be possible to put on in bigger size.

Why do two classes even exist? There used to only be one, but the dealership agreements with the truck manufacturer required the Rush family to maintain a certain amount of voting control. The stock was fairly split into A and B so that capital could be raised, options granted, and liquidity provided to Marvin without breaching the agreements.

SO WHAT?

This is an arb. At some point the A and B shares will trade at parity or better. Sooner or later the company will go broke, get bought out, start paying dividends, issue new stock (which will be class A) or resume it's buyback program (they'll be buying class B). In addition, the spread currently wide:

http://finance.yahoo.com/q/bc?t=5y&s=RUSHA&l=on&z=l&q=l&c=rushb

, so simple mean reversion should make this profitable.

But I own a ton of the B shares, and instead of just waiting for "some point", I'm going to get off my ass tomorrow and contact the CFO, who I've talked to in the past. I'll point out that this looks bad, like they really don't care about their shareholders, and request that they restart their buy-back program, which will allow them to cut compensation expense by purchasing cheap B shares, or at least let B shares be converted to A shares. Either one will narrow the discount in a hurry. They're determined to "grow the company", so the buyback is unlikely to happen, but I can't conceive of any objections to B/A convertibility.

I'm not going to discuss potential returns, because they depend on your funding costs. NASDAQ says that current short interest for RUSHA is 2.3MM shares, or less than 10% of shares outstanding, with 16 days to cover. I'm not putting the trade on, since I'd rather present as a long-suffering company supporter than a short-term speculator. If you're long only, it might make sense to take a flier on RUSHB given the discount. My current feelings are t quot;text/javascript"> hat I like the business, but am bleah about the stock.

Yours,

Bowd

Catalyst