Posts Tagged ‘Special Situation’

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Update: Puget Energy (PSD) Arbitrage

October 17th, 2008 by Jae Jun

I wasn’t planning to write an update on the PSD arbitrage but a reader asked for my opinion on how I currently see the PSD merger so I’ll share it with everyone else and try to provide additional information.

Reminder Points

If the deal is approved, each share of PSD will be converted to $30 cash.

The deal is being financed by a “consortium of long-term infrastructure investors led by Macquarie Infrastructure Partners, the Canada Pension Plan Investment Board and British Columbia Investment Management Corporation and also includes Alberta Investment Management, Macquarie-FSS Infrastructure Trust and Macquarie Capital Group (collectively, the Consortium).”

All approvals have been received and the only process remaining is for reply briefs to be submitted by Oct 23 so that the UTC can review it and make a decision.

Price as of this writing is around $22.40 with a spread of just under 33% with about 1 week remaining which is an annualized profit of 1488%! (since I was wrong about the timeline of 1 week, I cannot give the accurate %)

Along with every other company out there, Puget Energy was thrown out during the market meltdown.

Odds of the Merger

I’m going to do something very similar to what Sivaram from Can Turtles Fly has already done.

Upside Potential: 33%

Downside Potential: 10%

Probability of Success: > 90%

Probability of Failure: <10%

Time Frame: 1 week > 1week but < 1 month

From the odds that I’ve applied to the situation, this could be highly profitable.

Additional Details of the Merger

Back in July 23, PSD filed a multiparty stipulation involving Puget Holdings, Puget Sound Energy, Staff of the Washington Utilities and Transportation Commission, Industrial Customers of Northwest Utilities, Northwest Industrial Gas Users, The Energy Project, NW Energy Coalition, and The Kroger Company. A month later, on August 25, all but one of the issues have been agreed upon.

However, reading the appendix from the exhibits, it is clear to me that this one issue should not prevent or upset the merger. All parties, including the UTC staff, have basically given the Ok for the merger to be approved. Even though PSD has a lot to agree upon in the stipulation, I don’t see anything outrageous.

On Oct 9, a filing made by PSD reveals that capital has been committed and ALL approvals have been obtained. All that remains is a review of the reply briefs if they are submitted by Oct 23. This leaves 1 week for an announcement by the UTC.

Insiders have also been vesting their options without any of them selling of exercising. It’s always important to see how insiders view the merger and interviews and actions of insiders confirm that the merger is a high priority in 2008 and they all want to see it go through.

Risks

At this point, I only see that truly unpredictable occurrences, which the company has no control over, is the only thing that can upset the deal.

Completion Checklist

  1. Due diligence by both parties – Yes
  2. Financing and regulator approval – Yes
  3. Get preliminary shareholder sentiment (or controlling shareholder approval) – Yes
  4. Obtain regulator (SEC, FCC, any and all) approval – Yes
  5. Get final shareholder approval at a meeting called for that purpose – Yes
  6. Insiders continually vesting or buying shares – Yes

Conclusion

The market being what it is, irrationality has allowed the price to drop from the mid $27 to the mid $22 which is actually below pre-merger announcements. Even if by freak of nature the deal is canceled, the company offers a dividend yield of 4.5%. Not to mention that this is a reliable utility especially in times of a recession.

I don’t believe I’ve ever seen such an advantageous arbitrage opportunity as this one.

Disclosure

Entered into a 1/2 position at $22.50 and looking to add the remaining half between the range of $21.6 – $22.50.

[tags] arbitrage, psd, Special Situation,merger,utc[/tags]

Tags: arbitrage, merger, psd, Special Situation, utc
Posted in Special_Situation | 20 Comments »

Watch Alert: Puget Energy Arbitrage

September 15th, 2008 by Jae Jun

I have to admit, lately the content of the blog has been evolving to special situations. I’m not sure whether the readers are ok with this, but if not, please let me know. But I digress…

In the meantime, a merger that I have had my eyes on since announcement is Puget Energy. Puget Energy is a holding company but performs all of its operations through Puget Sound Energy which is based here in Seattle, right in my backyard.

As with most utility companies in a merger or privatization deal, the deal is nearing its 1 year announcement of October 26, which is something I look for because news from 1 year ago on Wall Street is history. As with the merger of Aquila, there are many approvals to be acquired but so far things have been progressing nicely.

I bring this up today because along with the panic that set in today with the financial markets melting down, PSD was also included in the sell off.

If the deal is finalized, PSD is to be converted to $30 in cash. It was trading in the $24’s at one point this morning and closed at $27.60 on Friday. The 8% drop just goes to show that the market is full of emotion. Who said markets were efficient? :)

I won’t be going over the details here as I want to get back to looking at the deal again and other potential bargains due to todays drop.

In the meantime, here is an interesting interview by Steve Reynolds, chairman, president and CEO of PSD to add to your research.

Disclosure

I own shares of PSD

[tags]arbitrage, merger, psd, special situation[/tags]

Tags: arbitrage, merger, psd, Special Situation
Posted in Special_Situation | 6 Comments »

A Tender That Was Too Good To Be True

September 8th, 2008 by Jae Jun

Silly me. First of all, sorry to disappoint those who were interested in what was supposed to be my first tender. I was too worked up about the odds and closing date of the tender that I completely glossed over the finer details. I didn’t purchase anything today and thankfully, it was a “free” lesson.

As a newbie to the whole tender process, here’s what happened and what I imagined would happen.

What I Imagined Would Happen

As I was trying to find info on tender offers, I came across a press release for Williams Industries (WMSI), “Williams Industries, Inc. Announces Extension of Odd-Lot Tender”.

“Aug 13, 2008 – Williams Industries, Inc. today announced the Company is extending its current odd-lot tender offer to October 13, 2008. The tender, which has been distributed to shareholders of 100 or less shares of the company’s stock, offers $2.75 per share. The tender was originally scheduled to end on August 18. The extension of the tender was authorized so that those shareholders wishing to participate would have the time necessary to complete required paperwork.”

Odds look tremendous. Buy 99 shares at the current price of $1.56 for $154.44 and tender the shares at $2.75 for a total of $272.25 which results in a gain of $117.81 before fees. After fees, it would have come out to a gain of $68.86 off an initial $154.44 investment which is a handsome gain of 44% within what would have been a couple of weeks.

You might be laughing at a gain of $70, but would you laugh when if somebody buys you a $70 dinner or gave you $70 in gas money?

The Reality

After my initial excitement and sleeping on it, I went to the SEC page and looked up the tender offer document. Things looked really good. The company has a good history of buying back shares and planned to repurchase about 26,000 shares for a total of $71,000. The extension of the tender signaled to me that the company was dead serious about buying back its shares and lowering the shareholder count.

Looking at the other filings, I believe the company wants to go private.

But all good things come to an end. It ended when I read the following line:

“The Company is offering to purchase for cash (the “Offer”) all shares of the Company’s common stock, $0.10 par value per share (the “Shares” or “Common Stock”), held by stockholders that owned 100 shares or fewer as of the close of business on May 7, 2008 (the “Record Date”) and that continue to own such Shares through the expiration date for the Offer”

Stockholders not on record as of May 7, 2008 are not eligible to tender their shares and the extension is merely to accommodate those that had trouble with paperwork. I assumed that anyone who “continued to own such Shares through the expiration date for the Offer” was eligible for the tender.

Lessons Learnt

  • Never completely trust 3rd party press release
  • Don’t forget to go over documents and the important paragraphs
  • Many Over The Counter (OTC) companies have odd lot tenders
  • Companies probably know more about tenders than the average investor
  • You don’t learn these kind of things in business school
  • Some things are too good to be true

Disclosure

No positions held in any stock mentioned

[tags]odd lot, tender, special situation[/tags]

Tags: Special Situation, stock tender
Posted in Special_Situation | 5 Comments »

Profit From Special Situations – Stock Tenders

September 7th, 2008 by Jae Jun

How is an individual investor able to get an edge over millions of others and especially institutions that spend every waking hour analyzing companies and crunching numbers? I mean, the way to profit is to know something that others don’t. Right?

It’s All About The Odds

For new or recent readers, I believe that investing is just like poker or any other form of game EXCEPT I control the odds, stakes and the bet. If an opportunity arises where the odds are in my favor, I would take it. If a bet came along where I had 60% of winning and 40% of losing, I would take it each time because probability confirms that in the long run, I end up winning. However, this all depends on how much capital is allocated and what your own risk rating is. 60% of winning $100 with a 40% chance of losing $500 may not suit everyone but a 75% chance of winning may change that factor.

It boils down to picking your spots. No blind bets should be made without calculating the odds, risks and timeline when investing in special situations.

What Is a Stock Tender?

A stock tender is when a company announces that it will be buying back a certain number of shares at either a specified price or in the form of a Dutch auction.

The purpose of a tender offer could be to reduce the number of stockholders of record and reduce or eliminate future servicing fees, SEC reporting costs and stock listing fees. Especially when it concerns smaller companies, having a large base of tiny stockholders can certainly eat away profits with administrative tasks.

This is an excerpt from Pinnacle Bancshares stock tender.

“We estimate that odd-lot stockholders who own less than 100 shares represent over 37% of our total stockholder base but approximately 0.3% of our total shares outstanding. If we are successful in reducing our total stockholders of record under 300, Pinnacle plans to deregister its common stock with the Securities and Exchange Commission and delist from the American Stock Exchange. As a result of these actions, we expect to save considerable costs related to SEC reporting requirements, costs associated with implementing and complying with the Sarbanes Oxley Act, stock listing fees and stock registrar costs. We also expect to reduce the significant amount of management time devoted to these activities.”

As a real example, Jonathon from My Money Blog participated in a stock tender with United Rentals (URI) where he purchased shares of URI at $19.81 which the company bought back for $22. Timeframe for this was under 1 month, so the gain of approx 10% is annualized to over 100%.

So the idea of a stock tender is pretty straightforward, but there are risks involved.

The Risks

This is a form of arbitrage but I do believe the risk is lower than merger acquisitions, where there are many factors that could suddenly cause the deal to fall apart. Unlike mergers, stockholders, FCC, regulations, protests, earthquakes etc are unlikely to cancel stock tenders.

Now back to the risks…

  • A company announces that it will buy back a certain number of shares, in United Rentals (URI) case, 27 million shares were to be bought back ranging from $22-$25. There is a risk that too many people would tender their shares and cause an oversubscription whereby your lot of shares may not be completely bought back (but there is a way to prevent this, which I will get to later on).
  • The company should have enough cash or have financing in order to buy back the shares. Just like in risk arbitrage, if the company doesn’t have the funding, the tender will get cancelled or amended to a lower buy back price.
  • Management could withdraw the tender at the last second. Nothing is set in stone when it comes to special situations.

Odd Lot Tenders

In case the tender is oversubscribed, people holding odd lots of shares under 100 are given preference when shares are bought back. This means, if you hold 99 shares and somebody else holds 100 shares, your tender is given a higher priority. Those who hold more than 100 in an oversubscribed tender will have their shares bought back at a pro rated basis. Thus buying 99 shares ensures the best return.

In some cases, companies specifically announce odd lot tenders where they will only buy back shares from those who hold less than 100 shares.

This is one of the areas where the small investors have an advantage over the big boys.

Some Things to Know

Once you purchase shares, you have to call your broker to let them know you want to tender your shares. I do all my investing through my 401k account with Fidelity and they charge $38 for the tendering. Buy commission of $10.95 and sell commission of $38 is $48.95 in fees alone, so choosing your spots is very important.

Don’t forget to factor in the capital gains tax as well.

I haven’t participated in any tenders yet, but there is one I plan to participate in come Monday. I’ll provide details as it unfolds.

With numerous realized gains of say 10%, the individual investor is able to profit even in such unstable and uncertain markets with minimal risk. This isn’t speculation and if you give the additional effort to look for it and read a few paragraphs from the SEC filings, your portfolio could do very well.

Disclosure

No positions in any stocks mentioned

Tags: Special Situation, stock tender
Posted in Special_Situation | 9 Comments »

Jazz Technologies Merger Arbitrage

August 30th, 2008 by Jae Jun

(This article originally appeared on The DIV-Net)

Jazz Technologies (JAZ) announced on May 19, 2008 that they are being acquired by Tower Semiconductor (TSEM). The final decision of the deal is expected to be announced dependent on the results of the special meeting of shareholders scheduled for September 17, 2008. When I started to look into this merger yesterday, the spread was at 15%. Today, August 13, the spread fluctuates between 6-9%. However, this still comes out to an annualized gain in the range of 40-72%.

Basics Of The Merger

  • If the deal goes through, each share of JAZ will be converted to 1.8 shares of TSEM.
  • Fractional shares will be paid in cash
  • JAZ options, vested or unvested, will be exercisable for 1.8x Tower ordinary shares.
  • All approvals received and the only hurdle left is shareholder approval by Jazz shareholders.
  • For more background on the merger and both companies, you can view a presentation by going here.

Termination Details

The termination conditions for this merger allow both parties to walk away fairly easily without much pain. The usual clauses pertaining to delays, failure to recommend the merger, failure to meet legal requirements etc are in there for good measure but the point that caught my attention is that the “Jazz has agreed to pay Tower a termination fee of $1.2 million and reimburse Tower for up to $1 million in expenses incurred in connection with the transaction…”

With this type of exit path, Jazz probably wouldn’t feel any burden or impact if it did decide to cancel the merger. However, the chances of this happening at this stage is very low.

Ever since Jazz went public with an IPO price of $6, their stock price has been falling. Therefore a 120% premium offer at the time of the merger is a definite welcome, one which the company and shareholders would gladly accept.

The merger also restricts Jazz from soliciting other transactions which means that it has to be Tower. Take it or leave it.

Approvals

The acquiring company, Tower Semiconductors, is an Israeli company and so the approval process is slightly different.

Tower’s submission of form F-4 has been declared effective by the SEC, clearing the way for Jazz shareholder approval. Tower does not require approval by its own shareholders.

Additionally, Tower must receive the following approvals in Israel.

  1. approval of the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor; (received June 3)
  2. approval of the Israeli Investment Center of the Israeli Ministry of Industry, Trade and Labor; (submitted)
  3. approval of the Israel Lands Administration; and
  4. approval of the Tel-Aviv Stock Exchange (listing of additional shares) (to be submitted at or around date of closing)

As it stands, all important milestones have been achieved in the merger process except the Jazz shareholder approval but this doesn’t really worry me because as I stated above, it would be crazy for shareholders to go against the merger.

While insiders also own roughly 20% of common stock, there are two companies that own about 31% and 29%. I can’t say for sure that it will be a unanimous vote, but insiders holding 20% is a large amount and one which could positively affect the outcome.

Completion Details

Since each share of Jazz is converted to 1.8 shares of Tower, the final closing price depends on Tower’s share price. Looking at Tower’s price, it isn’t doing very well either and is continually falling. There is a high likelihood that it could erode the spread completely.

So far this is how I see the merger. I also outlined a process I learnt and follow here.

  1. Due diligence by both parties – Yes
  2. Financing and regulator approval – Yes. No financing involved since shares are converted to 1.8x Towers. However, Tower is currently in “negotiation of a restructuring arrangement of its long-term debt with its lender banks, Bank Leumi and Bank Hapoalim, and one of its major shareholders, Israel Corporation Ltd. The restructuring will include a substantial reduction in the level of the Company’s debt to its banks and Israel Corporation, deferrals of remaining principal and interest, and a waiver from compliance with financial covenants for an extended period of time.” – D&R News
  3. Get preliminary shareholder sentiment (or controlling shareholder approval) – N/A
  4. Obtain regulator (SEC, FCC, any and all) approval – Yes
  5. Get final shareholder approval at a meeting called for that purpose – TBD

Risks

The risks I see are as follows:

  • Tower shares are thinly traded so even if the merger is successful, it may be difficult to sell.
  • If Tower share price continues to fall, a loss could be incurred
  • Tower is not a company I want to hold onto. No moat company in a bad industry.
  • Merger could be canceled. (low chance)
  • May not pass shareholders

Conclusion

From the information I have gathered, the merger is likely to go through. However, what is important is the price of Tower on the date of closing. If it declines at its current rate, this merger may not be worth it if the entry price is any higher than what it is now.

The merger is very low profile without much information being given out by either party. Jazz made it clear in their latest conference call that they would not answer any detailed questions related to the merger itself.

In terms of probability, I see the merger has a greater probability of closing than failing.

Disclaimer

No positions in JAZ at this time but I am considering.

[tags]arbitrage, jaz, merger, tsem, special situation[/tags]

Tags: arbitrage, jaz, merger, Special Situation, tsem
Posted in Special_Situation | 5 Comments »

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