WSP Holdings going private arbitrage

WSP Holdings (ticker: WH) is a Chinese manufacturer of tubing and drill pipes used in the oil and gas industry. Talks about a possible going private transaction have been ongoing since the end of 2011 when the company received a non-binding proposal to go private at $3.00 per share (adjusted for a reverse split). Since then there has been little news from the company, until today when it issued a press release that a definitive merger agreement has been reached and that it’s going to pay $3.20 per ADS. The company has not yet filed the form SC 13E3 so not all details are known yet, but I’m assuming that this is effectively $3.15 since there is probably a $0.05 ADS cancellation fee.

I was already long WH before the definitive merger agreement was reached, but I actually increased my position today since the risk of the deal not going through is now minimal and the spread between the current market price and the buyout price is significant. At the time of this writing the latest trade was at $2.85, implying a possible 10.5% return in probably 3/4 months time since the deal is expected to close in the second quarter.

I’m going to keep this write-up short, but to cover the main points:

  • CEO owns 51% of the outstanding shares and UMW owns 22.5%. They will both retain their equity interest in the company, and they have combined enough voting power to approve the going private transaction.
  • They have financing to fund the merger consideration
  • The financial health of the company is a bit sketchy: they have a lot of debt and actually breached debt covenants in the past. Business was bad because of US anti-dumping duties on Chinese OCTG suppliers in 2009. They have responded by building a facility in Thailand.

I don’t think that there is a significant risk that the deal is going to fall through at this point in time. The insiders know what they are buying, and if the financial condition of the company would have been a problem they would have exited the going private transaction a long time ago. Financing and shareholder approval also doesn’t seem to be a problem, so getting paid more than 10% while waiting for the transaction to close is in my opinion a very generous risk compensation.

Disclosure

Long WSP Holdings

2 thoughts on “WSP Holdings going private arbitrage

  1. Brent Barber

    Thanks for the heads up. Looks like a good one.

    Always more risk than usual with China (like the Bohong takeover of Canadian auto parts company Wescast), but more often than not, these work out well with a good return and generally too small for the big arb funds to get involved.

    Reply

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