Willbros Group merger arbitrage

Yesterday Willbros Group (OTC:WGRP) announced that it is being acquired by Primoris Services (NASDAQ:PRIM) in an all-cash deal for $0.60/share. With the stock currently trading at $0.55 a juicy spread of 9.1% remains. The biggest reason for the spread is presumably the fact that Willbros Group was on the verge of a bankruptcy before the merger was announced, and if the deal fails the downside is possibly close to 100%. If you look at the stock price of the company you can see it has been a train wreck the last half year. Willbros Group was trading above $3/share in November 2017 before dropping to $0.15/share earlier this week. A non-fundamental reason that might be a contributing factor to the spread is the fact that the stock was delisted from the NYSE this week as well and resumed trading on the pink sheets.

So it’s a situation with a bit of hair, but I also think that this is a deal that is almost certain to be completed, and because of that it’s still a bet with an attractive risk/reward ratio. I don’t think there are any meaningful regulatory hurdles to complete this deal, Primoris can finance the deal using cash on hand and existing credit facilities and “certain Willbros directors and shareholders”, representing ~17% of the outstanding shares, have agreed to vote in favor of the transaction. Given the fact that the $0.60/share offer represents an almost 300% premium to the last traded price I think getting enough other shareholders on board shouldn’t be a problem. So unless there is some skeleton still hiding in a closet somewhere there is little that could derail this deal, and it is expected to close soon: the second quarter of 2018.

Source: Primoris Services Corporation presentation


Long Willbros Group

11 thoughts on “Willbros Group merger arbitrage

  1. Derech Erech

    I actually think the spread factors in a possible push back from Willbros Group shareholders. They suffered a huge decline in their share value, as you mentioned, and might be looking to get more for their holdings.
    60 cents per share may look like a juicy bargain just a couple of days ago but for most of long time shareholders it’s nothing given where WG stock has been only few months ago.
    I think there’s some risk here and it might be very interesting to see how the acquisition vote plays out. Chance of not getting through with the acquisition cannot be easily dismissed.

    1. Alpha Vulture Post author

      I think that is indeed a bit of a risk factor in deals where the target has suffered a big decline in share price, but here I don’t think it’s a big one. With the largest shareholder already supporting the deal getting enough votes should be easy since getting 33% of the shares to vote in favour of the deal is a very low hurdle to clear.

      In addition to that, a premium of almost 300% most sound pretty reasonable, even for suffering long-term shareholders. And given the trading volume the past two days, presumably a huge amount of arbs have bought a position, and they will happily vote for the deal (if they are given the chance of course, don’t know the record date for the shareholder meeting yet).

  2. Pogonific

    I’m currently burning on the JASO “take-private” which is stalled, so I might be coloured by that experience but this feels quite risky given the history.
    You might want to take a look at the EURN / GNRT all share merger. I’m seeing it at 17% net IRR to completion with zero regulatory risk and 42% of GNRT shareholders having voted their support. Not quite as juicy as Willbros but I think even lower risk.

    1. Alpha Vulture Post author

      I’m not sure what commonality you see between JASO and this deal? You expect a high proportion of people to exercise appraisal rights here? I don’t see that happening…

      And yeah, the EURN/GNRT deal looks to have a decent spread. But cross border always make things a bit more risky and complicated as well… but think it’s a good bet.

  3. JG

    I don’t think shareholder approval is a problem.

    The liquidity problems are extremely imminent. The forbearance agreement basically states that lenders agree with WG breaking covenants as long as the merger is on track. When the merger would be voted down, the forbearance agreements can be terminated, at which point the company would probably have to file for chapter 11 or something. At that point i believe (but not sure) PRIM would actually be at the front row of lenders, as they seem to have come to an agreement with existing lenders that their 10-20M bridge loan is ‘first out’. So with debt holders favoring this deal, I think shareholders have a gun to their head. Take the offer, or take your chances in bankruptcy court.

    And that is where the second aspect of the situation becomes relevant: profitability levels are bad and have been bad for some time. Hence, a small short term liquidity loan would not be the solution to keep operating as a stand alone. Significant new capital would be required, and as they are already I believe pay 10% interest rates on their loans, I don’t think the debt markets are currently open to them. A significant loan restructuring in a bankruptcy proceeding combined with new capital could provide an opportunity to turn around the business. I would be very surprised to see such a process lead to higher outcome for shareholders. While this process takes place, the company will continue to burn money. It would require outside bidders that are willing to pay more for the company than currently being offered (If they want to do that, why didn;t they already, or if they had no chance, why wouldn’t they just do it before the merger vote?). A yes vote is a way to make the best of a terrible situation.

    Regarding Dissenters/shareholder vote/ JASO: In general when people vote no to a merger is when they think the consideration is not fair vs the value AND when they think the company has better prospects to obtain that value for shareholders as a standalone company. In the case of JASO, this seems the case as management makes a very clear lowball offer with no other reason to profit it from them themselves. In WG’s case, the offer is accepted because the company is otherwise at risk of going bankrupt, in which case no value would be realized. Although dissenters often get their way in US court (note: recently some contrarian verdict that where disadvantageous to dissenters) it usually seems to be in cases where a financially prosperous company is taken over for a price that apparently is to low.

    1. Alpha Vulture Post author

      I totally agree with what you wrote, but nevertheless, I would like to point out that shareholders sometimes don’t vote (maybe because after the stock is down 90%+ the position is not meaningful anymore for them) or vote against for irrational reasons if they are not happy with the management/train wreck stock they have gotten themselves into.

      A nice example this year where I also burned my fingers was ROSG. Initial deal was for a consideration between $0.60 and $0.70/share, but after multiple extensions of the shareholder meeting they were unable to obtain enough votes and the new deal that is now on the table is for ~$0.41/share (and still uncertain if they will be able to obtain enough votes this time around). But the big difference between this deal and the ROSG deal is that here we already have a big shareholder supporting the deal, where in the ROSG case insiders/parties connected with the acquiring company were unable to vote. So that makes a huge difference in how easy it is to get enough votes.

  4. Austin

    I would the odds of them getting the votes they need is very high. I don’t see see any obvious reasons to vote against the deal given the company’s liquidity situation. I think this is a good deal for Primoris as well, as they can add significant size to their business at a discounted price due to Willbros dire capital structure and liquidity situation. Primoris shares didn’t react negatively to the transaction, so there likely won’t be pressure on its management to back out of the deal.

  5. Cogitator

    The conditions to close seem rather benign, so the main hurdles to assess here IMO are two-fold:
    (1) Why wouldn’t Primoris simply wait until Willbros files Chapter 11? Equity class would be wiped out, so even if competing bids at that stage (say, from KKR), the winning bid would likely be lower than current EV…

    (2) Are there core reasons (other than their “promise”) that would hold Primoris back from using one of the many out clauses it has per the merger agreement? While the presence of a $4.3M termination fee (i.e. “poison pill” for any superior/alternate proposals within 18-months of merger cancellation) can be interpreted as a strong commitment by Willbros to see the deal through, the contract seems significantly more flexible for buyer than seller. (For instance, note the lack of usual Materiality exception for breach of reps & warranties (R&Ws) on page 68). Correct me if I’m mistaken.

    That said, it may well be that, in similar fashion to the Perfumeria privatization last year, Willbros has concluded that paying $40M “extra” to equityholders is worth forgoing the frictional costs/administrative commitment to pursuing Willbros out of bankruptcy.

    Or Alpha, if you’ve got some further comment/insight as to why you think Willbros wouldn’t utilize their numerous out-clauses in the merger agreement — even though there would be no penalty — that would be great. Thanks

    1. Alpha Vulture Post author

      I guess the easy answer is, if you want to pick this up from bankruptcy you wouldn’t take the current approach. And there are many reasons you can imagine why this might be the superior option from Primoris. There is for example no certainty that they will be able to make the winning bid in a bankruptcy, what kind of timeline there will be, what kind of additional costs Willbros and/or Primoris have to incur, what the state of the company will be after emerging from bankruptcy. Right now that can make a simple deal, and make a strategic acquisition at a sensible price. So that seems to me the way to go.

      1. Cogitator

        yeah those where my thoughts as well. As well as the fact that IRS section 382 NOL limitation rules are murky in post-bankruptcy situations. If they subsequently tried to sell Willbros after acquiring from bankruptcy, section 382 would kick in and those NOLs would go to zero for the future buyer. Whereas a change of control following an equity structured deal outside bankruptcy (as is currently the case) would only lead to deferrals in when those NOLs could be subsequently used. Add the frictional costs and the value of preserving NOLs together and it would appear paying $40M for the equity isn’t so dumb.

        Thanks man

  6. Austin

    I don’t see any surprises in the preliminary proxy filing. No financing condition. No government approvals needed. While anything can happen, the only obvious reason this wouldn’t close if that Willbros business rapidly deteriorates further, causing Primoris to pull the plug. Given the transaction is scheduled to close this quarter, that doesn’t seem particularly likely over such a short time frame.


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