Over the past few weeks, keen-eyed arbitrageurs have discovered an unusual discrepancy between “common” Class A and “preferred” Class B shares of Madrid-based media conglomerate Promotora de Informaciones or PRISA. There are three ways to play this small but easily-traded discrepancy. Arbitrageurs with short time horizons can take advantage of the naturally-fluctuating size of the discrepancy by cashing out their positions when the spread converges. They may also engage in a short-term conversion that could unlock dividend-related profits. Alternatively, those who can afford to wait may take advantage of a mandatory Class B to Class A conversion in May of 2014. Regardless, this trade offers potential profits of between 10 and 85 percent.
About Promotora de Informaciones S.A. (NYSE:PRIS)
Promotora de Informaciones is a Spanish media conglomerate that owns dozens of individual properties in Europe, Latin America and the United States. Although the company’s signature asset is Spain’s “El Pais” daily newspaper, its portfolio of broadcast radio stations in Portugal, Spain, Mexico, South America and the United States comprises its largest single asset collection. Other notable properties include Spain’s version of “Rolling Stone” magazine and the Digital Plus satellite-television network. Promotora de Informaciones also operates a small Spanish-language textbook division that primarily does business in Spain.
Competitors include international media providers such as News Corp (NASDAQ:NWSA) and Time Warner Inc. (NYSE:TWX). PRISA’s market is more specialized; however, the company doesn’t enjoy the high margins like many specialized companies. PRISA’s operating margin is 6.4% versus 16.5% at News Corp and 21.6% at Time Warner. The largest difference between PRISA and the others in the massive debt load. PRISA has a whopping 106 D/E while News Corp has a D/E of 55 and Time Warner of 66. Plus getting financing for any Spainish company today is much more difficult.
The company’s balance sheet has been affected by consumers’ shift to digital media as well as the ongoing European economic crisis. It has not been profitable for many quarters and has offered little guidance on when the situation might improve. As such, Promotora’s borrowing costs have steadily risen. However, most market-watchers expect the company to survive for the foreseeable future. Prominent investors have backed up this assessment: For instance, Carlos Slim recently took a 3 percent stake in Promotora and could easily step in to buy a greater share of the company. In 2012, Promotora de Informaciones employed about 13,000 people and lost $733 million on $3.5 billion in total revenues.
Two Share Classes
North American trading of PRISA shares is done through its Class A and B ADRs -B). Each ADR is equivalent to four European shares and largely mirrors the performance of its respective European share class. Although Class B shares were originally intended to pay out cash dividends of .175 euro, PRISA’s lack of profitability has made such a payout impossible. Instead, the company is returning “capital” to Class B shareholders in the form of Class A shares. The situation is the same for the ADRs.
Since they pay out an annual dividend, PRISA’s Class B shares would normally trade at a premium to its Class A shares. However, uncertainty about the company’s long-term viability has created a persistent price discrepancy between the two classes. In recent weeks, Class B ADRs have actually traded at a discount between $.03 and $.12 to Class A ADRs. This spread is significant enough to provide a significant arbitrage opportunity for seasoned investors.