Just before the end of the year I exited my position in WSP Holdings. Since the (already extended) deadline for the merger agreement was 31 December 2013 I thought it was prudent to exit my position. I do think it’s more likely than not that the merger will be completed, but if there would have been a time for bad news it would have been yesterday. With the passing of the merger deadline both parties could have walked away if they wanted without paying a breakup fee. This didn’t happen, and instead the company told in a press release that both parties were in discussions to extend the deadline once again.
The share price did drop a couple percentage points yesterday, and at my entry price of $2.66/share I stand to make a 18.4% return if the merger is completed at $3.20/share. Given the multiple delays so far I do think it’s obvious that this transaction is risky, because something isn’t progressing as planned. But I do think that both parties have the intention to complete the deal, and if the intention is still there they can probably find a way to make it work. With a possible return of 20% I do think I’m getting paid enough for whatever risk it is I’m taking, but this is certainly not a big position (at the moment).
Long WSP holdings (again)
WSP Holdings is an interesting play I’ve looked at. The challenge is haircutting (ie, probability weighting) the upside and downside scenarios.
What would you quantify as the downside risk if the going private doesn’t materialize, and the probability of it happening?
Happy New Year!
Though to guess what the downside exactly is when the merger isn’t completed. The stock traded at ~$1.50/share or something like that when the initial going private proposal was made, but that is years ago. I do think that there is now less of a concern about possible fraud, but on the other hand the performance of the business hasn’t been great… My best guess is somewhere between $1 and $2/share…
About the probability; it’s of course really hard to guess something that is basically impossible to know. I do think it’s very likely that the deal will be completed, probably >90%. The current market price implies a probability around ~65% or so if you assume the downside is ~$1.5/share.
I would agree with your estimates. I considered a downside of about -35% if the transaction fails, where the price returns to a similar range you indicated, ~$1.65. Given I’m not as comfortable with PRC investments, I would give the downside case a 20-40% probability, which still gives a reasonable risk-return profile for a small workout position. Thanks.
Looks like the risk/return profile is only getting better today…
Aren’t you concerned about the deteriorating performance of the underlying business? They seem to be posting loss after loss, which doesn’t improve their bargaining power.
At the moment we have only the Asta position in common. I have been following your blog for quite some time. Thanks for writing.
Yes, that’s certainly a concern, although I don’t think it’s really deteriorating; it just continues to be crappy… Despite the business performance I do think there is probably value for the buyers at $3.20/share price since the biggest shareholder isn’t cashing out, and management actually agreed to pay a slight increase above the original $3/share offer. If the business performance would have been the problem in this deal I would have expected that the buyers would have walked away after the first deadline passed, or after the second. Since they didn’t I’m thinking they still want to complete the deal.
“The subsidiary did not meet certain financial covenants under the syndicated loan facility agreement for the year ended December 31, 2012. The bank syndicate held a review meeting and reached an agreement to waive the aforementioned breaches of financial covenants. The formal approval process within the bank syndicate is currently underway. Another two subsidiaries of the Company are also in breach of their financial covenants under project loans.”
–> They are already in breach of covenants. Why would a buyer pay a full price and not go to WSP’s banks and pay them to force WSP to repay? Then grab WSP for a lower price.
Because the buyer in this case the companies management, and they already own the majority of the equity.
They own already a huge part of the company. But this doesn’t mean they want to overpay. They could just pay enough to not get sued. As the company is loosing money and in breach of covenants, the value seems to be schrinking. On the other hand if management is honest and has integrity, this could work out fine.
It’s astonishing how creative Chinese companies are these days to extract value from minorities. Look at zenix auto for example: http://www.prnasia.com/sa/attachment/2013/11/20131125224014256500.pdf
There is always the possibility of a “surprise move” of these companies 🙂