Inaction and WSP Holdings

Earlier this year I wrote about WSP Holdings. The CEO wants to take the company private, and at the time I thought that the spread between the market price and the offer price was attractive. I sold the majority of my position months ago when the spread narrowed, but I did hold on to a few shares in the expectation that the deal would be closed fairly quick.

Since then not a whole lot happened until this month when a Seeking Alpha article was published that argued that the stock was a short. Since the original planning was that the deal would be closed in the second quarter of 2013 it’s reasonable to assume that something is wrong, and it doesn’t help that the annual report has been delayed for months. The financial performance of the company was pretty poor the past two years, and with minimal break-up fees you could imagine that the CEO wants to walk away from the deal if business has taken a turn for the worse.

As a result of the article the share price of WSP Holdings dropped from ~$2.90 to a low of $1.68 while the offer price is $3.20. Yesterday the company announced that the deadline for the merger would be extended to December 31, 2013 instead of August 21, 2013 and as a result the stock price moved back up to $2.49.

Doing nothing

So what did I do when all this was going down? Absolutely nothing… Should I have sold when the deal was significantly delayed while the stock was still trading at a fairly high level? Should I have bought more when it dropped a bunch on nothing but a Seeking Alpha article?

The main reason why it was difficult to act for me was that I simply don’t know what’s going on. If the short thesis would have been built on the assumption that WSP Holdings is a fraud things would have been easy, because I’m convinced that it isn’t. The questions raised by the Seeking Alpha article were however from a different nature.

Taking a high level view there are a few things I know:

  1. The company is real (lots tangible activities outside China)
  2. The CEO had the intention to go private in the beginning of this year because you don’t waste a lot of money on lawyers for fun
  3. The deal price was (at that time) probably a good one for him since the biggest investor choose to retain his stake

With the extension of the deadline I think it’s a good bet that the intention of going private is still there. I don’t know exactly what’s going on, and why the deal is delayed, but when the stock price is moved significantly when a retail investor posts an article on Seeking Alpha I think you can be pretty sure that no-one else really knows what’s going on and how the risk of this deal should be priced.

Conclusion

With the stock at $2.49 and a deal on the table for $3.20 I think you will be getting paid plenty for whatever risk you are taking. So I decided to add to my position again today. I probably should have done it earlier at lower prices, but that’s easy to say in hindsight, and not a reason to not buy once you have figured out what is important and what isn’t. In the end I think most of the concerns raised in the Seeking Alpha article are just minor negatives. The single most important thing is whether or not there is still the intent to do this deal. Thanks to yesterdays press release I think the intent is still there, and what’s left is a stock that no-one dares to touch and knows how to price. Smells like an opportunity to me.

Disclosure

Long WSP Holdings

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