Capital Properties: Special Situation Deal Gone Bad

Recently, I’ve been highlighting several very profitable trades in the Special Situations Real Money Portfolio. The last one was the profitable merger arbitrage associated with the cash buyout of Anheuser Busch by InBev, now know as Anheuser-Busch InBev (INBVF). Well, it was bound to happen. My streak of good luck has run out. The reverse split going private transaction being conducted by Capital Properties Inc. (CPI) I bought into last week with my BUD cash didn’t pan out.

Back in August, Capital Properties Inc. announced that its Board of Directors had decided to take the company private by doing a reverse split. The proposed reverse split involved converting 75 shares into 1 share. Shareholders owning less than 75 shares would be cashed out for $25.00 per share. I shared this information with members of Fat Pitch Financials Contributors Corner.

It was not until the company issued a definitive proxy in October that I became interested in this deal. From experience, I’ve found the risk of a going private transaction being cancelled goes down significantly after a definitive proxy announcing the date of the shareholders meeting is issued. The vote date for this deal was set to be November 13th. However, in an amended filing, management delayed the meeting until November 21st.

On November 21, 2008, the shareholders approved the reverse split and going private proposal. However, management issued a press release after the market closed that day where they announced, “After considering the cost to the Company of the reverse stock split and the relatively small benefit to be derived, the Board of Directors decided not to implement the reverse stock split.” That was it for this going private transaction deal.

I quickly decided to sell. I placed a limit order over that weekend to sell all 74 shares of CPI in the Special Situations Real Money Portfolio at a price above $19.51. When the market opened on Monday, the first quote for the stock was $0.04. My jaw dropped. I went to check my account, and I found that my order was completed at a sale price of $22.65. Since I originally bought my shares on November 19th at $22.75, I only lost a small amount of money. My total loss came to just $21.31, a negative 1.3% return including commissions.

Even though I came out of this cancelled transaction relatively unscathed, it still disturbs me that a Board can so easily override the will of a company’s shareholders. I recommend that the remaining shareholders of Capital Properites carefully consider whether the current Board of Directors best serves their interests.