archon $2.14 Preferred ARHNP
July 26, 2006 - 5:51pm EST by
2006 2007
Price: 4.95 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 22 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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  • Preferred stock


Matt657 wrote up the common stock of Archon on 2/8/2003 at $6.50 and again on 10/12/2004 at $8.50. Had you (or I, ruefully) followed his advice, we would have earned a 79.47% annualized rate-of-return on the first and a 103.76% annualized rate-of-return on the second. Archon common is still cheap based on a $450 million option agreement signed on June 24,2006 for the Company's Las Vegas property. I will leave the story on the common up to Matt657 and speak to the Company's preferred stock.

There are 4.4 million shares of preferred stock outstanding. The Company does not account for the preferred in a standard fashion. Instead, it lists the preferred value at face ($2.14 per share or $9.445 miilion) on the liability side of its balance. On the income statement, the company has annually deducted the dividends owed on par - the $9.445 million. In a footnote the Company notes that "The accrued stock dividends have not been recorded as an increase to the preferred stock account. As of September 30, 2005, the aggregate liquidation preference of the preferred stock was approximately $20.2 million, or $4.58 per share. On September 30,2006, the liquidation preferrence, under this method will be $4.93.

However, this calculation is incorrect. The Certificate of Designation of the Exchangeable Redeemable Preferred Stock states that the preferred is entitled to "cumulative cash dividends at a rate per annum per share (the "Dividend Rate") initially set at 8%[and subsequent increases]of (i) $2.14 plus (ii) accrued but unpaid dividends as to which a Dividend Payment Date (as defined below) has occurred." I believe, and my very expensive lawyers concur, that this means that preferred holders are entitled to par ($2.14) plus accrued with unpaid dividends accruing at the contract rate. Thew contact rate has been 16% since 4/1/2004. Consequently, the each preferred
share was worth $6.95 on the 3/31/2006 dividend date and will be worth $7.50 on the 9/30/2006 date. Today each preferred is worth $7.30. At $4.95, an investor is buying that $7.30 for 67.8%. This is equivalent to buying a 16% bond at $67.8 for a 23.65 current yield. If the Company refinaces the preferred in 1 year your yield-to-call will be 64.55, in 2 years 41.155, and in 3 years 33.9%. If it takes 10 years, the yield-to-call declines to 24.85%.
From my mouth to God's ear!


$5,000,000 was paid on the option June 24th and is now non-refundable. Another $40 million will be due on September 22, 2006 if the deal goes through and $2 million a month thereafter - plenty of money to refinance this high rate instrument.
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