Xerox Capital XER.PR.A.TSE
October 25, 2005 - 8:17pm EST by
2005 2006
Price: 44.20 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 90 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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The purchase of Xerox Capital LLC Deferred Preferred Shares Series A (XER.PR.A on TSE) represents a very low-risk, modest-return arbitrage opportunity.

Xerox Capital Preferred Shares Series A mature on February 28, 2006 at $45.23. They currently trade at $44.20, thus offering an annualized return of 7% with much lower risk than a standard risk arbitrage deal. Given that short-term Canadian debt instruments trade in the 3% range, the return on these shares compares favourably.

Since Xerox Corporation has an equity market capitalization of US$12.5 billion, it is highly unlikely that there is any significant risk to not being paid at maturity. The total value of this preferred issue at maturity is $90.5 million Canadian.

I am recommending these shares for Canadian and other eligible tax deferred accounts. According to the prospectus, it would appear that US investors are not eligible to purchase these securities. The prospectus states the following:

“In order to avoid inadvertent breaches of United States securities laws, the transfer of Series A Preferred Shares to U.S. persons is prohibited, whether in this offering or subsequently in the secondary market.”

I recommend that all investors seek the appropriate advice when deciding if an investment in these shares is suitable.

These preferred shares were originally issued in 1996 by Xerox Capital at $25 Canadian with a maturity value of $45.23 ten years later, representing an annualized return of 6.54%.

Xerox Capital is a company organized under the laws of the Turks and Caicos Islands. Xerox Corporation owns all of the common shares of Xerox Capital. The proceeds from the preferred share issue were loaned to Xerox Corporation (called the Series A Loans). Xerox Corporation guarantees the payment on maturity of the preferred shares, however their obligations under this guarantee rank junior to all liabilities of Xerox Corporation and its obligations under the Series A Loans rank junior to all senior indebtedness of Xerox Corporation.

Though the return on this idea is modest, the risk is low as well. To paraphrase Warren Buffett, “this is an idea where you’ll stay rich, as opposed to get rich.”


-February 28, 2006 maturity date
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