Northern Offshore merger arbitrage

Northern Offshore (NOF, NFSHF) is a marine drilling company that managed to attract the attention of several value investors in 2014 (a good write-up can be found here). Even when oil prices were high it was a somewhat speculative investment, and when oil prices crashed at the end of 2014 the stock followed. In the past year, the stock moved from a high of NOK12.55/share to a low of NOK1.75/share. In hindsight, the selling panic in the stock proved to be an excellent buying point since Shandong Offshore International announced that they reached a deal to acquire the company at NOK7.59/share two weeks ago. While the big money has now been made I think that playing the merger arbitrage is also attractive. The stock is currently trading at NOK7.20/share which implies a possible 5.4% absolute return.

I think that is a big spread for a deal that should be pretty low risk. There is no regulatory risk, the deal will be financed from the purchaser’s existing cash resources and 65% of NOF shareholders have already indicated that they will vote in favor for the acquisition. In addition to this there is a US$12.5 million break-up fee payable by the purchaser if they fail to complete the acquisition. That’s a large fee since the total deal value is just US$160 million. I’m guessing that the spread is relatively large because it’s a transaction in a small cap stock on a foreign exchange (for most investors), and the fact that the acquirer is a Chinese company is probably also not helping. If this is indeed a real risk I think you are getting paid enough to take it.

Northern Producer

Disclosure

Long Northern Offshore

11 thoughts on “Northern Offshore merger arbitrage

    1. Alpha Vulture Post author

      I don’t think the break-up fee is put into escrow (I would have expected to have read something about that if that would have been the case). But don’t think that is a big problem in this case. Shandong Offshore is incorporated in Hong Kong and operates globally. This is not a Chinese mainland company that can ignore western courts.

      Reply
      1. Martin

        “Shandong Offshore International Company Limited was incorporated on 2015-05-28. This company is now Live, their business is recorded as Private company limited by shares. As so far this company has running for 93 days. ”
        http://www.hkcompany.org/co.php?id=2242988

        Where did you find more information on their international business? Thank you.

        Reply
        1. Alpha Vulture Post author

          I believe that they are also the owners of Blue Ocean Drilling that is located in Houston. In the press release, you see that they are going to combine the two companies.

          Reply
          1. Martin

            I don’t know how to access the court filings to see ownership, but as you write there are press releases. This seems to be at least partly a strategic buy, which is good imho. I will wait a little bit longer with purchase.

            http://usa.chinadaily.com.cn/us/2014-10/16/content_18756880.htm
            Blue Ocean Drilling Limited (BOD), registered in the Cayman Islands and operating from Houston, is a newly established subsidiary of Shandong Offshore Equipment Company, Ltd (SDOE) based in Qingdao.

            http://splash247.com/new-offshore-equipment-builder-in-shandong/
            Dalian: Shandong Offshore Engineering Equipment, which is jointly invested in by Shandong Ocean Investment, Shandong Shipping and Qingdao Shipping, has been officially established.

    1. Alpha Vulture Post author

      It depends. It varies based on the possible upside and downside, and the probability of those two scenario’s. Usually it’s between a 2% and 5% portfolio position, but sometimes bigger and sometimes smaller.

      Reply
  1. A Kumar

    Do you know what the implied price is for the NFSHF that trades on the OTC market (given whatever ADR exchange ratio)? Basically trying to figure out the absolute return if I buy the USD traded stock.

    Reply
  2. Phil

    I was happy to see the Northern buyout, thanks for turning me on to it. I also have a position in Awilco as well as PGN, the later a binary outcome at this point. But I think Awilco is similar to Northern in that they have very little debt and ample liquidity, what are your thoughts on the M&A chances there? Do you still consider fair value in the $13 range for Awilco?

    Reply

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