Untying the Knots: Simplifying Corporate Actions

Understanding the impact of corporate actions is necessary when contemplating the right investment strategy. This impact is driven by timely awareness, accuracy, and attention to detail. In this blog, S&P's Global Corporate Action team will discuss some of the most dominant corporate actions announced each month and the roles they take in the marketplace.

Bed Bath & …. Beyond?

Bed Bath & Beyond (NASDAQ: BBBY), once one of America's top retailers of home goods, now finds itself on the verge of filing Bankruptcy. The Company has been beleaguered by slumping sales, executive disruptions, and debt-ridden struggles, to name a few. With many other retailers unable to bounce back in recent years, will Bed Bath & Beyond be the exception?

Scrambling to stay afloat

The company's market footprint has decreased significantly over the years. In May 2022, there were 955 stores, compared to 1,478 at the end of Q1 2020. This past September, plans were announced to close an additional 150 stores, including 56 closures by the end of 2022. Additionally, the company is trimming their corporate and supply chain workforce by 20%.

The company also postponed its quarterly dividend, which last paid on April 14, 2020, stating "it was taking decisive action across our business to proactively manage the unprecedented financial and operational impacts of COVID-19, while prioritizing the investments that will allow us to rebuild and grow" [1].

Bed Bath & Beyond is looking for a hero in their CEO, but how much of an impact can one person make? Sue Grove, current interim CEO, replaced Mark Tritton, who was ousted this past June after only two years at the helm. With an almost insurmountable task of saving this sinking ship, much like her predecessor, and his predecessor, we wish you luck, Sue!

They made their bed….

Not surprisingly, net sales plummeted 28% last quarter and comparable sales crashed 26% from the year-ago period [2]. Another troubling sign is the significant downward trend in the amount of cash on hand. Comparing first quarter results from 2021 vs 2022 [3], the amount of cash decreased considerably from $1.1 billion to only $140 million.

Although the company has improved its liquidity by securing $850 million from new loans as of the end of September, it feels more like the proverbial kicking the can down the road situation, merely staving off the inevitable.

Looking at their existing debt: The company has $1.2 billion in unsecured notes with maturity dates spread across 2024, 2034 and 2044, all trading below par. The solution from Bed Bath & Beyond? They issued an exchange offer, where holders will receive $217.5 principal amount of new convertible notes for every $1,000 principal amount of existing notes. That flag is BRIGHT red. The offer has been extended twice so far, most recently to December 5, 2022.

Is it time to lie in it?

We saw many failed attempts across retailers to save their businesses in recent years: J.C. Penny, Neiman Marcus, and Toys "R" Us to name a few. Will Bed Bath & Beyond be the success story among the ruin or will this holiday season be its last?

S&P Global's Corporate Actions team monitors, validates, maintains & reports on global equity & debt instruments and will keep clients updated of any future transaction(s) this Issuer undertakes.

End of an Era?

Founded in 1939, Toshiba Corp is a Japanese conglomerate with a broad range of business segments spanning Energy System Solutions, Infrastructure System Solutions, Retail & Printing Solutions, Storage & Device Solutions, Industrial ICT Solutions, and Logistics Solutions [4].

However, despite its rich history that dates to the development of Japan as a nation, Toshiba Corp was plagued with troubles that resulted in discontentment between its corporate management board and its foreign shareholders.

In a nutshell, Toshiba Corp has been struggling with its finances since 2008, and in 2015, Toshiba Corp committed a USD1.22 billion accounting fraud. Along with Toshiba's reputation taking a massive hit, it also lost billions on its U.S. nuclear business in 2016, which led to a capital raising of new shares worth 600 billion yen to 60 overseas investors. This allowed Toshiba Corp to avoid a delisting from JPX [5] [6] [7].

This brought an influx of foreign shareholders into the company's register, allowing them to vote on critical agendas at the Annual General Meetings (AGMs). Over the years, the relationship between these foreign shareholders and the Toshiba Corp corporate management was not easy when news broke out about Toshiba colluding with the government to influence voting at the AGM in July 2020 [8].

After the proposal to split Toshiba into two parts faced strong opposition from foreign shareholders, Toshiba Corp continued to assess potential bids from private equity firms and other investors to consider taking the conglomerate private [9].

This could be one of the largest Acquisition deals in Asia for 2022 if this pushes through…

With a valuation of 2.4 trillion Yen, a potential offer from Japan Industrial Partners (JIP) currently prices Toshiba Corp (6502.T) at 5541 Yen per share. JIP and its Consortium were granted preferred bidder status by Toshiba on October 12th, 2022 but are still open to proposals from other bidders [10].

Who are the parties to the Consortium?

As of now, nothing has been set in stone. From what we know, JIP is negotiating to form a partnership with Orix Corp (8591.T) and Chubu Electrical Power Co (9502.T), along with investment firms Baring Private Equity Asia and CVC Capital Partners for equity commitments. JIP seeks to raise 1 trillion yen in cash with their partners and bank liquidity support of 1.4 trillion Yen and a credit line of 200 billion Yen. JIP was expected to provide a solid proposal with commitment letters to Toshiba by November 7, 2022 [11].

Japan State-Backed Fund Japan Investment Corp (JIC) is also looking to form a potential joint bid for Toshiba Corp, with private equity firms MBK Partners and Bain Capital as a rival bid group [12].

MCA's Update

Toshiba Corp is one of the companies under the Foreign Exchange and Foreign Trade Act for its nuclear expertise. Any offer will be reviewed and approved by the Japanese government before proceeding. From our perspective, if the offer and the privatization of Toshiba Corp work against Japan's national interest, the privatization of Toshiba Corp is highly unlikely to proceed.

On the other hand, if an offer finalizes and the Japanese government authorizes the acquisition, MCA will proceed to set up and publish either a Tender Offer or a Merger event on the Toshiba Corp security ID.

Not a Bad Gig: Spirit Airlines

As many of you may recall from the April 2022 Untying the Knots edition [13], S&P's Corporate Actions experts discussed the bidding war merger between Frontier Airlines and JetBlue for Spirit Airlines during the prevalent supply chain disruption found around the globe. Since the original post, Spirit has officially broken up with Frontier Airlines and is now settling to make it work with JetBlue.

Should all things go as planned, the expectations are for the deal to close during the first half of 2024. So, who does JetBlue have to convince at this point? Shareholders or the overarching regulatory counsels? Answer is… probably a bit of both.

From a shareholder perspective, JetBlue has upped its reverse break-up fee to USD 400 million from USD 350 million if regulators don't approve the deal, and also increased its promised special dividend to Spirit shareholders of USD 2.50 a share, up from its previous offer of USD 1.50 [14].

Nothing too crazy, right? Well, lets dive into this dividend a bit more:

A "Special" Dividend can be referred to as such for a number of different reasons. These reasons can be tied to the fact that the cash distribution is outside of the company's normal distribution cycle, has a different taxation component, is a larger cash amount compared to regular distributions, or is attached to a specific event like a spin-off or merger. In the Spirit/JetBlue scenario, we are dealing with the latest. Nonetheless, there is something even "more special" about this particular dividend payment.

According to the Special Dividend's agreement, the payment would be made through a "ticking fee" component where Spirt shareholders would receive 10 cents each month from January 2023 onwards until either the Merger is completed or terminated [15].

We've heard of "sweeteners" before, but never a guaranteed payment regardless of whether the Merger goes through or not. JetBlue's CEO Robin Hayes even wrote "This offer reflects the seriousness of our commitment and underscores our confidence in completing this transaction" [16].

When reviewing over 15 historical Special Dividends tied to Merger transactions, starting from 2015 with Kraft Foods Group, Inc. and H.J. Heinz to more recent examples in 2022 between Oasis Petroleum and Whiting, the agreements all had very explicit and distinct wording surrounding the fact the either the Merger has to go through or else it's a no-go. So, the reality becomes… how could you NOT? Guaranteed cash as you await regulatory limbo which is an unavoidable component when dealing with this type of transaction. Needless to say, Spirit shareholders have approved the Merger and the Special Dividend sits in an Approved status within MCA's Corporate Actions platform.

The Rolling Model

In 2009, the Italian CONSOB, also known as the 'Italian Companies and Exchange Commission', announced their discovery concerning a phenomenon tied to capital increases with a high or "significant dilutive effect". To begin, these transactions are characterized as having:

1. a high ratio between the number of shares issued and the number of shares outstanding; and
2. a significant gap between the subscription price of the new shares and the stock market price of the last trading day before the start of the rights issue.

When these conditions are met, investors find that the same amount of money could buy you a larger number of shares ex-rights in a Rights Offering event. It was even more noticeable that during the first days of the subscription period, there was a pronounced overestimation of the market price of the shares ex-rights compared to their theoretical value [17].

But can you measure the degree of dilution?

Actually, yes. And it is typically done so through a measurement tool known as the "K Factor". This factor is calculated by Borsa Italiana, and it is inversely proportional to the degree of dilution within a transaction. According to the measurement, the maximum level of dilution corresponds to a value of the K factor near to zero. Therefore, since the beginning, CONSOB set a very conservative threshold of the K factor equal to 0.5, whereby a rights issue falling below that threshold could be considered as having a significant dilutive effect.

At the start of the subscription period, the market's management company makes the amendments applying the K factor, according to the financial hypothesis that the rights issue has already been executed. However, when new shares are issued only at the end of the subscription period, a stock squeeze is created.

CONSOB monitored this phenomenon since its beginning in order to find the most appropriate solution to solve these price anomalies. After years of research, the only solution was the so-called "rolling model."

This model consists in the delivery of the newly issued shares during each day of the subscription period. This solution would address the stock squeeze and, as a result, would allow the realignment of the stock market price to the fair value.

So, let's break this down:

To begin, CONSOB must first determine that the rights issue is highly dilutive. Once confirmed, Borsa Italiana informs the market through a Warning Notice that the rights issue will be managed using the rolling model. In turn, if the rights issue is not highly dilutive, the capital increase is managed according to the standard model.

During the highly dilutive rights issue, it is possible to exercise the subscription rights in each day of the capital increase starting from the third day. The early exercise must be done within the time limits set in the instructions for the CSD Service of Monte Titoli SPA, and with the contractual conditions agreed. The newly issued shares from such "early" exercise are then made available immediately.

The early delivery of the newly issued shares is aimed at allowing arbitrage activity between shares and subscription rights starting from the first day of the rights issue, minimizing the risk of price anomalies. Alternatively, subscription rights can be exercised according to the standard non-rolling model with the delivery of the newly issued shares at the end of the rights issue.

The MCA Way: Banca Monte dei Paschi di Siena S.p.A.

Since the Rolling Model came into effect in 2016, several highly dilutive rights issues have been carried out; Banca Carige S.p.A. in 2017, Valtellinese S.p.A. in 2018, Trevi Finanziaria Industriale S.p.A. in 2020, and most recently, Banca Monte dei Paschi di Siena S.p.A in October 2022 [18].

According to the Board of Directors of Banca Monte dei Paschi di Siena S.p.A, the company resolved to carry out a rights issue for a maximum of 1,249,665,648 newly issued ordinary shares to be offered with pre-emptive rights at a subscription price of EUR 2 per new share, at a ratio of 374 new shares for each 3 shares held. The pre-emptive rights will be exercisable from October 17 to October 31, 2022, inclusive. The Option Rights will also be tradable on Euronext Milan from October 17 to October 25, 2022 [19].

A Warning Notice was issued about the upcoming highly-dilutive rights issue of Banca MPS S.p.A. The rights issue with significant dilutive effect implied the risk of a potential overvaluation of the shares' market price compared to their theorical value, as well as a risk of high volatility in the shares' price during the subscription period. As such, in order to minimize this risk, Consob announced that the rights issue would be managed according to the so-called rolling model.

MCA's approach to the rolling model of Banca MPS S.p.A.'s rights issue was the creation of two Exercise options:

• Option 1: Accounting Option - Holders of 3 rights may subscribe for 374 new shares at the subscription price of EUR 2 per share.
• Option 2: Rolling Option - Holders of 3 rights may subscribe for 374 new shares at the subscription price of EUR 2 per share.

In case of further questions, please reach out to S&P's Global Corporate Actions experts for more information on the processing of the Rolling Model events.

Interested in more? Please find our:

Global Corporate Actions' September 2022 Blog Post

Global Corporate Actions' August 2022 Blog Post

Global Corporate Actions' June 2022 Blog Post

Global Corporate Actions' April 2022 Blog Post

Global Corporate Actions' March 2022 Blog Post

Global Corporate Actions' February 2022 Blog Post

Global Corporate Actions' January 2022 Blog Post

Global Corporate Action's November 2021 Blog Post

Global Corporate Action's October 2021 Blog Post

Global Corporate Action's September 2021 Blog Post

Global Corporate Action's August 2021 Blog Post

Global Corporate Action's July 2021 Blog Post

Global Corporate Action's June 2021 Blog Post

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.