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Perpetual Preferred Security Being Issued Transfers US$145 Million of Value to a Non-Shareholder at the Expense of Existing Common Shareholders
Agreement Seeks to Entrench Management and Board
NEW YORK, Jan. 24, 2023 (GLOBE NEWSWIRE) -- Luxor Capital Group, LP ("Luxor"), as the manager of funds owning approximately 3.6% of the outstanding shares of Ritchie Bros. Auctioneers Incorporated (NYSE:RBA) (TSX:RBA) ("RBA" or the "Company"), today commented on RBA's purported restructuring of RBA's proposed merger with IAA, Inc. (NYSE:IAA) (the "IAA Merger").
Luxor is deeply concerned that management and the board of directors (the "Board") of RBA chose to further entrench themselves by entering into a completely unnecessary financing with Starboard Value LP ("Starboard"). After announcing a transaction for IAA that was deeply unpopular among shareholders, instead of listening to those concerns and engaging on the merits with its constituents, management and the Board further harmed their common shareholders by transferring, in Luxor's estimation, in excess of $145 million to a third party who does not appear to have ever been invested in the Company. In a collective drive to save face and consummate the ill-conceived IAA Merger, management and the Board issued a valuable security worth 130% of par, per Luxor's estimation, to a non-shareholder.1
Given RBA's strong financial position and the operating performance of standalone RBA, the only conclusion Luxor can draw is that RBA's management and Board hoped that by issuing the preferred security to Starboard (the "Starboard Perpetual Preferred") at massively below-market terms, the hollow endorsement that came along with the US$145 million transfer would somehow turn away the tide of shareholder discontent. Luxor is certainly not swayed.
Luxor believes that the "revised" IAA Merger has done little to change the financial terms for RBA shareholders. Indeed, the minor change in equity issuance by RBA in the revised deal is overwhelmed by the extravagant terms offered to Starboard.
The most glaring and obvious issue with the Starboard Perpetual Preferred is, as its name suggests, its preference in the capital structure to all existing common shareholders of RBA. Convertible structures are not inherently disadvantageous, but in normally functioning companies with good governance, boards don't give out seniority without extracting advantageous terms elsewhere in the security. Typically, this trade-off implies that convertible holders, because of the downside protection provided by their seniority, receive less relative to common holders when the stock price rises significantly and receive more relatively when the stock price rises slowly or falls. In this instance, RBA shareholders receive none of these types of benefits whatsoever. No matter what happens to RBA, Starboard will significantly outperform common shareholders.
The nominal coupon on this security is 5.5%, but importantly, the Starboard Perpetual Preferred participates in all common shareholder dividends, thereby creating an effective annual coupon of 6.979% (see Appendix for detailed calculations), which will escalate in-line with any increases in dividends paid to common shareholders. Moreover, as additional proof of misalignment with RBA common shareholders and value transfer by RBA's management and Board to Starboard, the dividend participation by the Starboard Perpetual Preferred is "subject to a floor of US$0.27 per common share". In other words, the Starboard Perpetual Preferred will benefit fully from any growth in the quarterly dividends paid to RBA shareholders from the current level, but will enjoy none of the downside that RBA shareholders will experience if the dividend is ever reduced, for any reason. No matter what happens to the common share dividend, Starboard's dividend materially exceeds common shareholders' dividends.
The security is also effectively not callable by RBA for nine years. For nine years Starboard will enjoy a dividend rate at least 5.5% higher than that of common shareholders. Compounded at 5.5% for nine years, Starboard will receive 62% of its capital investment back in excess dividends. This compares to the ~20% conversion premium in the security. No matter what happens to the value of RBA common shares, Starboard materially outperforms common shareholders.
As a common shareholder, Luxor takes no comfort whatsoever with the endorsement that comes along with such an off-market security. Luxor takes no comfort whatsoever in Starboard representing common shareholders' interests as their own, as Starboard is overwhelmingly in a different class of stock that has dramatically conflicting priorities to those of the common shareholders. Luxor believes that shareholder representation on the Board is warranted, but qualified director candidates committed to acting in the best interests of ALL shareholders are available without transferring US$145 million of RBA common shareholder money.
Luxor continues to believe that the IAA Merger risks the permanent destruction of over US$1.8 billion of shareholder value2 and that RBA's standalone businesses offer the clearest and most logical path for the Company to deliver the optimal outcome for all of its common shareholders. Luxor looks forward to continuing its opposition to this ill-conceived merger, which has illuminated for all common shareholders RBA's missteps and egregious corporate governance.
Appendix:
Annualized Yield Calculation
| Coupon paid quarterly: | 1.375 | % | ||||
| Participation in common stock dividend (1): | 0.370 | % | ||||
| Total quarterly coupon + dividend: | 1.745 | % | ||||
| Annualized yield: | 6.979 | % | ||||
| (1) Common Stock Dividend Calculation | ||||||
| Par value of Preferred | $1,000 | |||||
| Conversion price | $73 | |||||
| RBA Shares at Conversion | 13.70 | |||||
| Quarterly common div/share | $0.27 | |||||
| Quarterly dividends received | $3.70 | |||||
| Additional quarterly yield | 0.370 | % | ||||
About Luxor Capital Group, LP:
Luxor Capital Group, LP is a multi-billion-dollar investment manager, which was founded in 2002 and is based in New York. It makes investments through its fundamental, long-term oriented investment process. The firm has an extensive history of investing in global marketplaces businesses.
