Del Monte Pacific [DELM 14.44 6.80%] announced last week that it would redeem the first series of its preferred shares that are traded under the “DMPA1” ticker symbol, for $10 US per share, plus any accrued/unpaid dividends, minus transfer costs.
Considering that there are 20 million DMPA1 shares in circulation, that amounts to about $200 million that DELM must pay to get the obligation of the preferred shares off its books in accordance with the terms of the shares themselves.
Yesterday, DELM disclosed that it voluntarily suspended trading in DMPA1, in order to determine who the shareholders will be as of March 25, which is the ex-date of the redemption of the shares.
DELM didn’t rule out re-issuing the Series 1-A shares at some point in the future, but said that it currently “has no current plans” to do so.
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This kind of thing looks and sounds pretty serious, but in reality, this is how preferred shares work: the company takes on an obligation to pay dividends in return for a quick injection of cash, and then, at some point in the future, when it has enough money and its situation has improved or changed such that carrying the obligation of paying the dividends becomes more expensive than redeeming the shares, it simply redeems the shares.
All of this is done under the terms of the preferred shares themselves, including the “redemption price” that must be paid in order for DELM to do this.
Selling preferred shares is a pretty easy way of raising some money for a company that might not want to take on additional debt (or be able to take on additional debt), and the obligation (dividends) is neatly predictable in a way that executives can easily plan for (and around).
This kind of transaction basically comes down to a “price of money” calculation; if DELM can get a good deal on a term loan from a bank, or it has the cash on-hand with nothing better to spend it on, it can deploy that cheap debt or cash to get rid of the more-expensive preferred shares obligation.
It’s corporate financial hygiene in action.
It’s not exciting, but it’s mildly interesting to me when I start to think about money as having a “price” in the context of these sorts of moves.
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