Yesterday at the end of the evening the story broke that the family controlling Sapec want to take the company private at €60/share after the payment of the €150 special dividend. This is great news, because I would have happily sold my shares for a lot less after receiving the dividend. Sapec has a book value per share of €41.60, and as you can see here I was doing my math with €30/share valuation for the stub. The book value doesn’t ascribe any value to the €36 million Sapec has provided for the Novo Bank guarantee. While the market has been skeptical about a recovery of this it could be worth up to €27/share, so the offer price of €60/share seems pretty fair. I think there is a very low risk that this deal will fall through. After the special dividend the family obviously has the liquidity to buy out minority shareholders, the fund that controls 15% of the outstanding shares has agreed to tender at €60/share and the family already controls 55% of the outstanding shares.
The timing of the announcement is a little bit unfortunate for me. The stock is scheduled to trade ex-dividend tomorrow with the payable date being Friday at the end of the week, and I thought it would be a good idea to substantially increase my position. With the majority of the cash coming back super fast the internal rate of return is pretty good, even when it would take five or six years to utilize the tax deductible this trade would generate. Yesterday the stock was halted, and today the price is of course up significantly. Luckily the math still works for me, and while it hurts to buy the stock so much higher I did execute the plan and increased my position from 5% to almost 50%!
It’s a big bet, but in my mind not as big as it sounds. I see it more as a roughly 15% position in the stub and a 5% position in a Belgium tax receivable while the Dutch tax credits provide lots of almost free upside. After the special dividend I think the stub should trade close to €60/share so I would be able to close out that part of the trade fast as well, and if it doesn’t it will probably be an attractive merger arb play.
Author is massively long Sapec
At the end of last year, on the 20th of December, Destination Maternity (NASDAQ:DEST) and Orchestra Prémaman (EPA:KAZI) announced that they had entered in a definitive merger agreement in which Orchestra Prémaman would acquire Destination Maternity in an all stock deal. Destination Maternity shareholders are going to get 0.515 Orchestra Prémaman shares in the form of ADSs that will be listed in the US and will own 28% of the combined company after completion of the transaction. The consideration represented a 34% premium at the time of the announcement, and since it’s a deal between two relative small companies with no regulatory or financing risk you wouldn’t expect a huge merger spread.
This couldn’t be farther from the truth than possible though. Ever since the deal was announced the spread has bounced around 20% (although sometimes spiking down or up significantly), and in the past week the spread has exploded to a totally ridiculous 63%. This week the spread has come down a bit again, but is with 36% still offering an extremely compelling opportunity in my opinion. I wrote an article about it on Seeking Alpha that after a 24 hour embargo is now accessible for everybody. You can find it here.
Source: authors own calculations, based on Yahoo Finance pricing data
Author is long Destination Maternity
Sapec SA is a Belgian holding company that sold their main asset last year, and is going to pay out the majority of the proceeds using a dividend of €150/share. After the dividend is paid some additional cash and some small stakes in various businesses will remain in the holding company with a total book value of €41.60/share. Assuming a 30% holding company discount the stub should be worth roughly €30/share. So if there wouldn’t be dividend taxes you would expect that Sapec would currently be trading at roughly €180/share.
Unfortunately for many investors there are dividend taxes, and in case of Belgium these are a hefty 30 percent. Because of that the stock is trading at just €152.50/share which offers an opportunity for investors who can reclaim some of these taxes and/or use paid dividend taxes as a tax deductible. The author of the “value and opportunity” blog who has been following this situation for some time, discusses here how German investors can get around the tax issue.
Dutch investors have a similar opportunity. There is a double taxation treaty with Belgium that makes it possible to reclaim 15% of the dividend taxes from Belgium (I think most countries have this, but reclaiming the tax might not be equally easy for all countries). From what I have read the procedure isn’t that complicated, although it requires some paperwork and patience. Apparently it can take more than a year before Belgium repays the 15% of the dividend taxes. The other 15% of the dividend taxes can be used as a tax credit against the annual Dutch wealth tax. So you have to be careful not to buy a too big position because then can’t fully deduct it from your Dutch taxes (it’s possible to carry the remaining tax forward to the next year, but this add some complications that makes it not attractive for me). So the trade would look like this:
|5/23/2017||-152.50||Buy Sapec SA|
|8/20/2017||+105.00||Payment dividend (estimated date)|
|8/20/2017||+30.00||Sell Sapec SA sub (estimated value, estimated date)|
|6/30/2018||+22.50||Use tax credit to offset Dutch wealth tax (estimated date)|
|12/31/2018||+22.50||Receive Belgium tax reclaim (estimated date)|
| ||IRR|| 40.78%|
As you can see the internal rate of return of this trade is more than excellent! It’s a bit sad though for Belgium investors. Sapec is a Belgium company, and they are the ones who have no way to avoid paying the tax. The company promised to research options to return capital in a tax efficient manner for small shareholders (the big holders don’t have to pay dividend taxes), but in they end they choose the worst option possible for retail investors.
Author is long Sapec SA
I have a small position in T Bancshares, Inc. (OTCMKTS:TBNC) that is being acquired for $8.0275 in cash plus a special dividend that is based on the equity of the company just before closing. The dividend is estimated to be $2.6067 (subject to adjustment based on the change in equity of TBNC in April), and since all regulatory approvals have been obtained the merger is scheduled to close next Monday on the 15th of May. What makes the situation interesting is that the market is confused whether or not the stock is currently trading ex-dividend. The record date of the dividend is May 12, 2017 with a payment date of May 15, 2017. Normally the ex-dividend date is two days before the record date, so the stock should be trading ex-dividend since Wednesday and the shares should be worth $8.0275. My broker seems to think so:
The cyan colored bar represents the amount and date of the dividend according to my broker
With the shares currently trading with a bid/ask of 10.30/10.45 there is an opportunity. Either the stock is now trading ex-dividend and it’s worth $8.0275 or it’s trading with dividend and it’s worth $10.63. The reason for the confusion is probably because the dividend will only be paid if the merger is completed, and on OTCMarkets.com we can read the following:
The special dividend will only be paid in connection with the merger. FINRA will not set an “ex” date for this distribution.
If no ex-date is set for the distribution it seems to me that the stock can’t be trading ex-dividend currently, and it should still be worth $10.63. I bought a couple of additional shares at $10.40 since I believe that this is the correct interpretation of the situation, but it’s perhaps not the greatest bet. If I’m right I will make $0.23/share (plus an adjustment to the dividend that I expect to be ~$0.10/share) while if I’m wrong I will lose $2.37/share. So I better be right….
Author is long TBNC
More than two years ago, in January 2015, I participated in my first merger arbitrage deal that had a contingent value right (actually two) as part of the payment. Since then I have participated in more deals with CVRs, but since the payment is usually contingent on events pretty far in the future I haven’t get a single cent from them so far. That’s however going to change soon since Albertsons announced that the first CVR will pay 1.7 cents with a possible additional 0.03 cents coming later. It’s a very insignificant amount (adding just 0.0156% to this years return), and also a bit disappointing since the CVR was valued at $0.0488/share at the time of the merger. Nevertheless, it’s fun to finally get a little bit of money from my collection of CVRs.
The real action will be next year when the far more important CVR connected to the value of Casa Ley will expire. That one was valued at $1.0149/share at the time of the deal, and could have a more material positive impact on my portfolio :).
Author is long the two CVRs issued in connection with the SWY merger