Last Primo Water shares released from escrow

Last year I participated in the merger arbitrage between Primo Water and Glacier Water, calling it the merger arb of the year. Because of the unusual deal structure it will take a long time to know exactly what the result will be, but today the last Primo Water shares were released from escrow which clarifies at least one piece of the puzzle. I expected that all the escrow shares  would be delivered to former Glacier Water shareholders, and that proved to be the case. Of course, just the fact that we did get all the shares doesn’t mean that it was a sure thing. Risks that didn’t materialize are unobservable, and are the main reason why making sense of investment results is so hard. But at least it’s a clue that perhaps I had the right idea.

With the last Primo Water shares sold my preliminary result is looking as follows:

Description Date # of PRMW shares Realized price Net cash flow
Buy 1 GWSV share 10/24/2016 -$22.98
Cash merger consideration 12/26/2016 $12.1761
Initial share payment 12/26/2016 0.252975 $12.73 $3.2204
1st escrow release 6/29/2017 0.154838 $12.83 $1.9866
2nd escrow release 9/11/2017 0.154838 $11.69 $1.8101
3rd (final) escrow release 12/20/2017 0.309676 $12.75 $3.9484
Sum: $0.1615
IRR: 1.61%

As you can see, the result so far isn’t exactly a home run, but part of the reason is that the share price of Primo Water dropped and I realized an weighted price of $12.57 which is 9.0% lower than the $13.81 the stock was trading at when the position was initiated. In theory I could have hedged my Primo Water exposure, but in practice this isn’t easy nor is it free. So this is just variance I will have to accept. Sometimes it will hurt results, sometimes it will boost them.

But more importantly, this isn’t the whole merger consideration yet. The warrants, another part of the deal, still have 4 year left till expiry, have a strike of $11.88 and are worth $3.87 at the moment (assuming 30% volatility). Since we got 0.54 warrant per GWSV share that means that even with a slightly lower Primo Water price the expected payoff is still looking pretty good. What will happen next will mostly be noise from an investment process perspective, but nevertheless, if this blog is still alive in four years time I will let you know how this ended :).


Author has no direct position in Primo Water, but owns the warrants

29 thoughts on “Last Primo Water shares released from escrow

  1. Paul

    “The warrants, another part of the deal, still have 4 year left till expiry, have a strike of $11.88 and are worth $3.87 at the moment (assuming 30% volatility).”

    Is your working assumption to wait 4 years and then optionally exercise? Or do you also have a value approach related to how the business is performing which determines a price level at which you will sell?

    Personally, I see little relationship between the (relatively high) model value and the (relatively poor) business.

    1. Alpha Vulture Post author

      I cannot sell the warrants, only exercise them early which destroys all the extrinsic value they have. So at this moment thinking about what to do is sort of pointless. They really have to be very very deep in the money before I would consider an early exercise. So yes, my assumption is that I will probably hold them for 4 years and then exercise (or not) based on the current share price.

      1. Thijs

        That also used to be my thinking with my first warrants.. however, after having held multiple stashes of warrants over the years I find it’s definitely better to have a target on the underlying and at least exercise + sell half or so when it moves there (or all).. yes, that does imply some work on the fundamentals, but is very worth it in my experience.

        The underlying very rarely trades at the high on the final day, just think about all the other people wanting to exercise then. Remember: you will never be able to cash on time value when the warrants aren’t listed. So you need to think carefully when (price) to exercise, and forget about the time value.

        1. Alpha Vulture Post author

          I sort of understand where you are coming from, but I think with options time value is just too important to ignore or throw away. My price target for, lets say bitcoin, might be $0, but at the same time I would be extremely happy buying options with a $20,000 strike if someone sells them with a 20% volatility.

      2. Travis

        If you want to realize some of the time value you could sell calls against your warrants.

        Thanks for posting this idea in the first place.

    1. Alpha Vulture Post author

      I looked it up for you. Looks like it recognized a LT capital gain for the whole amount of the shares released from escrow. So presumably the year before when the merger closed they recognized a sizable ST capital loss as well.

  2. Zimbo

    PRMW trades now at 17.25. Nice, nice, nice as the strike price is 11.88.

    For me this means a few k€ as I took your advice earlier and this is a significant windfall.
    I am willing to hold these warrants for years, but might as well capitalise now.
    Do you have a comment?

    1. Alpha Vulture Post author

      I will probably just hold them till maturity. The option value of the warrants is still significant, and wouldn’t want to waste that by exercising early.

  3. Jonny

    From Barrons June 9, 2018

    The Activist Spotlight

    Primo Water (ticker: PRMW)

    Business: provides multigallon purified bottled water, self-service refill water, and water dispensers.
    Investor’s Average Cost: $11.60
    Stock Market Value: $638 mil ($17.79/share)

    What’s Happening: Legion Partners has acquired a 5.2% position for investment purposes.

    Key Numbers:
    33%: the potential increase in refill pricing the company could achieve, from 30 cents per gallon to 40 cents per gallon
    40%: the approximate number of “withhold” votes that two of the three director nominees received at the last annual meeting

    Behind the Scenes: Legion Partners is an activist investor that prefers to work in the background. Primo Water sells its products in the U.S. and Canada at more than 46,000 locations, including stores run by Walmart, Kroger, Walgreens, and CVS. The company has a “razor-razorblade” strategy, as its dispensers need to be refilled. In 2016, Primo acquired Glacier Water Services.

    Primo is currently raising prices on its refill machines, implementing cashless payment options for them, and cross-selling legacy Primo retailers with refill services and legacy Glacier retailers with exchange services.

    Legion likes this business and believes that Ebitda margins will expand significantly over the next several years, as management executes its plan. Legion has a history of getting board seats, usually through settling with companies, and is probably talking with the company regarding corporate governance and compensation. Moreover, there were signs of shareholder discontent at Primo’s last annual meeting. Accordingly, if Legion wants board representation, it should have no problem obtaining it.

    — Kenneth Squire

      1. Zimbo

        I asked IB to exercise 400 warrants. Costs are 200 USD.

        It has now taken a month during and it is not done yet. PRMW has dropped during this time 20%. Exercising warrants seems to take enormously long time.

        1. Fundamentalist

          Exercising delays is something one should have in mind when warrants expiration date approaches – assuming that not exercising them before the expiration date would deem them worthless. However, exercising them now would forego a lot of time-value…

    1. Alpha Vulture Post author

      I suspect the warrants will remain outstanding and if you exercise them early you get the cash+share combo of the merger. But would also like to see it confirmed how the warrants will be handled exactly.

      1. Dave

        I just read the 8k – My understanding is that you will get a cash consideration of $14/warrant, net of the Exercise price and taxes. Correct?

  4. Alpha Vulture Post author

    No, the 8-K says the following:

    Immediately prior to the first effective time, each warrant then outstanding and unexercised and that has a per-share exercise price less than the amount of the cash consideration will be settled and paid to such holder in Primo shares (net of any Primo shares equal in value to the aggregate exercise price thereof and any applicable tax to be deducted or withheld in respect thereof) at a per-share price equal to the cash consideration, and such holder will have the right to submit an election to receive transaction consideration with respect to such settled and paid Primo shares. Any warrant with an exercise price greater than the cash consideration will be cancelled for no consideration.

    So what will happen is that you will get Primo shares based on a $14/share value. Next you can elect, like regular Primo shareholders, if how you want your merger consideration paid (cash and/or stock).

  5. Curt

    I have Primo warrants and am at Interactive Brokers. It it a good/reasonable idea to exercise the warrants now, and sell the PRMW stock for over $14. These warrants are in the money, right?

  6. bolo

    Re exercising before the merger–Has anyone received info from Interactive Brokers re: what exercise will cost and how long it will take to process? Zimbo’s post above from 2018 is giving me pause…


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