Guaranteed Profit with FIS Odd Lot Tender

July 17, 2010 | Comments (30)

The author of Value Uncovered is a long time reader of OSV and has graciously allowed me to repost his latest article and special situation idea on FIS.

I only read blogs that offer high quality information and ideas, and Value Uncovered is a new blog that I am glad to read and would recommend to all value investors.

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Fidelity National Information Services, Inc (FIS) is a financial services company with over $3.7 billion in annual sales, focused on credit card and mortgage processing.

Background

On May 6, 2010, the Wall Street Journal reported that FIS was in talks with the Blackstone Group and THL Partners, two private equity firms, about a leveraged buyout in the $10-11 billion range.

The stock jumped on the announcement, and moved even higher after rumors surfaced that another private equity firm wanted in on the deal as well. News organizations increased their estimates to more than $15 billion, making it potentially the largest leveraged buyout since the start of the credit crisis.

However, on May 18, the deal fell through and the Company decided to pursue a leveraged recapitalization plan and substantial share repurchase instead.

Announcement

On May 25, the Company released a statement outlining the terms of the recapitalization plan:

As stated in the news release, our Board of Directors has authorized a plan under which our Company will repurchase up to $2.5 billion of its common stock at a price range of between $29.00 – $31.00 per share through a modified “Dutch auction” tender offer. In order to effect the proposed recapitalization, we intend to borrow approximately $2.5 billion of incremental debt. FIS is in a strong financial position and generates significant free cash flow, so we are very comfortable with the proposed debt levels that we will incur in repurchasing the company stock.

Odd-Lot Provision

Although the final price level and number of shares purchased will be determined by the dutch auction, the tender offer provides priority to ‘odd lot’ shareholders of less than 100 shares.

Even if the offering is oversubscribed, this provision ensures small shareholders will receive a full cash-out without any proration, a great opportunity for the average investor.

Timeline

May 25: FIS announces details about the proposed recapitalization plan and self-tender offer.

July 6:  The Company sells $1.1 billion in Notes to qualified institutional buyers, the main condition for the share repurchase

July 6: FIS commences the tender offer.

July 16: Proposed closing of $1.1 billion Note offering

August 3: Conclusion of the tender offer

Late August: Shareholders who validly tender their shares will be cashed out at the final auction price, with priority for the ‘odd lot’ shareholders defined above.

Return Scenarios

As of July 9, I’m adding FIS to my ValueUncovered portfolio using the latest closing price of $27.70.

FIS Tender Offer - Return Scenarios

Final Tender Price

TBD

Conclusion

The deal offers attractive annualized returns for a month long trade.  Although there is always risks with such a large transaction, FIS is very well capitalized and I don’t forsee any problems with the offer going through.

I think Frank Martire, the Company’s President & CEO, says it best:

The recapitalization plan is consistent with our commitment to doing what is in the best interests of our company, our clients and our shareholders. Our strong financial position, combined with appropriate market conditions and our excellent relationships with lenders, make this the right move at the right time.

Disclosure

Value Uncovered & Old School Value is long FIS

About Jae Jun


Jae Jun is the founder of Old School Value. He is on a mission to provide practical and actionable value investing tools, tutorials and educational material to help empower the individual investor. Keep in touch with Jae via any of the methods linked below.

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  • Jim

    Great idea and it makes for a knowledgeable case study. Unfortunately though, it most likely is a proposition that isn’t worth the time. If the purchase point is at $27.70 and your exit is at $29.00, for example, after a minimal 15% capital gains tax is subtracted – you’d walk away with $109.40.

    However, this isn’t to discredit the article at all because this is an excellent example of how to invest in value.

  • tedk81

    talking about “apy” with these huge cool-looking numbers is kinda silly, don’t you think?

    best case scenario you make $200.

  • http://www.oldschoolvalue.com Jae Jun

    @ Jim,
    These odd lot tenders will only benefit people with very small portfolios. If you do it from a tax deferred account, it does make it worthwhile, especially if you can do this at least 5 times a year.

    @ tedk81,
    It’s all about frequency with these special situations. You take a little each time to add it all up.

  • tedk81

    yeah i agree its all about frequency but its really all about frequency for people with tiny little play money portfolios. the time it takes to do the DD to make sure everything is cool is just too much to ask for with the stakes so tiny.

  • http://www.oldschoolvalue.com Jae Jun

    I’m sure many people don’t have huge portfolios and if you have some cash in your account, settling for a 5% profit is much better than 0.

    Due diligence doesn’t take that long either. I would take $130 for spending 30-40min reading a few documents any day.

  • Jim

    Great points Jae.

  • Alfred

    Jae,

    Good article. I’m new to tender offers and the dutch auction process. How do you tender shares? Do you have to tell your broker at what price you would tender your shares? What happens if the final tender price is lower than the one you designate to your broker? What happens if not enough shares are tendered?

    Thanks,

    Alfred

  • http://www.oldschoolvalue.com Jae Jun

    @ Alfred,

    Once you buy 99 shares (no more than 99) you simply call your broker and tell them you want to “tender your FIS shares”. Then they will put you on hold, tell you the fee will be $20 or more and the order will be executed. The tender price cannot be lower than the one stated unless the financing goes bust, at which point you should immediately sell anyways.

    If you hold 99 shares and no more, your shares will be tendered for certain. Only if you have more will there be a likelihood that your shares will not be tendered.

  • Al

    Jae, what do you think of this line as a condition for consummation,

    If more than $2.5 billion in aggregate value of shares (or such lesser amount as FIS may elect to purchase, subject to applicable law) are properly tendered and not properly withdrawn…

    According to FIS’ statement, at least 25% of the float must validly tender for the company to execute the transaction. If that condition isn’t met, then you have to trust that the company will lower its target.

  • Al

    Nevermind… the tender offer explicitly states that there is no minimum tendered condition.

  • http://www.oldschoolvalue.com Jae Jun

    Yes but be careful because like I said, if you hold more than 99, all your shares may not be tendered.

  • http://www.moneyvineyard.com/ Chris Murphy

    This is my first time commenting on your site, so before I go on I just wanted to say thanks for all of the great information on the site. I especially like the back-tests, screening, and spreadsheets.

    This is my first time investing in a special situation. I have read through the documents filed on EDGAR, and this FIS deal sounds like a good deal.

    But the one thing that concerned me was that FIS kept saying that this tender offer is contingent on getting the proper financing. This might be a dumb question or you might have answered this already but, has FIS already gained access to the 2.5 billion in financing?

    Also I know right now the latest date for tendering is Aug. 3, but when can we can we first tender our shares? And is there a recommended time to tender, for example as late as possible? or does it not make any difference when we tender?

    Sorry for for so many questions this is just my first time involved in a deal like this. Thanks in advance!
    .-= Chris Murphy´s last blog ..How To Think Like Warren Buffet =-.

  • George

    Can you tender 99 shares from two different kinds of accounts with the same social security number?- e.g. from an IRA and also from a taxable account.

  • http://www.oldschoolvalue.com Jae Jun

    @ Chris,

    Thanks for taking the time to comment with a good question.

    ALL mergers, tenders, buyouts or any other special situation is dependent on financing. Those comments in the documents are just necessary as a precautionary statement. Not much to worry about in this case.

    When your buy order has been processed and you hold the shares, you can call your broker any time before Aug3 (minus 3 days, just in case) to tender your shares.

    No recommended time. It’s all the same. You won’t receive your money until it is announced that the dutch auction has been successfully completed.

  • http://www.oldschoolvalue.com Jae Jun

    @ George,

    I asked the same question to Adam. Here is what it says in the document.

    This preference is not available to partial tenders or to beneficial or record holders of an aggregate of 100 or more Shares, even if these holders have separate accounts or share certificates representing fewer than 100 Shares.

  • http://compoundinglife.com Ken

    One other thing to note. My broker (Etrade) requires that trades have settled before they will process the tender paperwork. So add three days from the date of purchase when factoring in deadlines.
    .-= Ken´s last blog ..Festival of Stocks 178 February 1st 2010 =-.

  • Rocky

    Jae,

    This is an intriguing offer. When do you have to purchase the shares buy in order to participate in this offering. And is it available to stockholders outside of the US. (I live in Canada) There doesn’t seem to be much downside risk at this point. What is the likelihood in your mind of the offering falling through? What are some potential risks here?

    Rocky

  • http://www.oldschoolvalue.com Jae Jun

    @ Rocky,
    The only risk with these types of plays is the financing but Im not too worried about it at this point.

    Company has agreed to sell $600 million of 7.625% senior unsecured notes due 2017 and $500 million of 7.875% senior unsecured notes due 2020 (collectively, the “Notes”). The Notes will be guaranteed by certain subsidiaries of FIS. The offerings of the Notes are expected to close on July 16, 2010.

  • http://www.oldschoolvalue.com Jae Jun

    For people with more questions, the FAQ released by the company is a good guide.
    http://sec.gov/Archives/edgar/data/1136893/000095012310064646/g23989exv99waw1wo.htm

  • Rocky

    Thanks, Jae.

  • http://www.oldschoolvalue.com Jae Jun

    FYI

    I tendered my shares today at the minimum bid of $29.

    Didn’t know I had to set a price, but the broker person kept asking me what price I wanted to tender at.

    Not sure myself whether I will get $29 while others get $30 or more.

  • http://www.valueuncovered.com asues

    Jae,

    First, thanks for posting my article and handling all of the comments. I’ve been on vacation for a week and am just getting caught up.

    From my understanding of the Dutch Auction process, all shares will be cashed out at the same price. In these scenarios, I always tender my shares at the minimum and cross my fingers for a higher price within the range. By buying at a decent discount to the minimum bid, you are guaranteed at least some profit, with potential for much more.

    For larger shareholders, proration is a real risk in these type of transactions, as usually there is decent demand to tender shares. Although absolute profits are small on a dollar basis, these type of transactions provide a very nice annualized return, and they occur frequently throughout the year.

    Right now, I’m having a hard time finding undervalued companies in the traditional sense, so am very happy putting my money to work in these type of transactions.

    It sure beats a savings account!
    .-= asues´s last blog ..FIS Tender Offer – Special Situations Investing =-.

  • http://www.oldschoolvalue.com Jae Jun

    With 0.1% interest rate these days, I’m certainly not complaining :)
    From my bank account, I only receive $4.18 interest YTD. lol.

  • George

    Jae- You are OK with a $29 bid, since in a Dutch auction everyone pays the same price. So if the auction results in a price over $29, say $30, you get $30.

    But for odd lot tenders it is usually best to use a “no bid” tender which maximizes the chance of being tendered even if the prices change later.

  • http://www.oldschoolvalue.com Jae Jun

    That’s good to hear and clears up something I wasn’t sure about.

  • http://None Greg

    I may be way off here, but wouldn’t it make sense to bid as high as possible? 31.00? That drives the bidding up towards the upper margin. For holders with 99 shares or less our shares will be tendered no matter what (or rather, there’s a very high probability of our shares being tendered) at a minimum of 29.00.

  • http://NA Greg

    Ooops! I understand now how the Dutch Auction works.

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