Last chapter of the Glacier Water merger arb

In 2016 I participated in the merger of Glacier Water with Primo Water (NASDAQ:PRMW), calling it at the time the merger arbitrage of the year. It was a somewhat complex deal with the payment composed of a mix of cash, stock and warrants and with a part of the stock portion of the deal locked up in multiple escrow tranches. At the end of 2017 I received the last Primo Water shares from escrow, making the merger arbitrage marginally profitable, but with some warrants remaining with an expiry date in December 2021 anything could still happen.

That something turned out to be the acquisition of Primo Water by Cott (NYSE:COT) this year in a combination of stock and cash. While the deal provided a nice boost to the stock price of Primo Water, it unfortunately also means a premature end of the warrants. In the merger the company will convert the warrants to stock, based on the $14/share cash consideration of the merger. I wonder if this is actually legally correct, because in the warrant agreement I don’t see anything about the possibility of terminating the warrants early in case of a corporate action. If I have a reader that is an expert in this subject matter I would love to hear from you.

That said, it is at this point just a theoretical discussion to satisfy my curiosity. With Primo Water trading above the $14 cash consideration that would be used to calculate the merger consideration for the warrants I decided to exercise them early, and sell the stock. That creates the following final picture of the results:

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
Exercise warrants and sell stock 2/13/2020 0.116049 $15.29 $1.7744
Sum: $1.9359
IRR: 14.40%

As you can see the end result is okay, but not very spectacular. Unfortunately Primo Water proved to be a mediocre business with an equally mediocre growth in share price. When I bought Glacier Water in 2016 the stock was trading at $13.81. Now, more than 3 years later, while the stock market has exploded upwards PRMW is barely above $15/share. And that is after receiving a decent merger premium. So it’s easy to imagine how this could have turned out different, but truth to be told, it was also clear in 2016 that Primo Water was priced high.

Disclosure

No positions anymore

8 thoughts on “Last chapter of the Glacier Water merger arb

  1. Brian H

    Thanks for post and reminder on the warrants. PRMW is indeed pretty mediocre. Prim’s prior venture, Blue Rhino, was a much more logical idea, given that propane otherwise has to be delivered and isn’t piped into homes like water is. Housewives, the largest target market, aren’t super keen on hauling giant heavy barrels of water home from the grocery store. In fact, it was a great short in the first year or so after going public, and was representative of some of the marginal stuff that manages to get floated during frothy markets.

    Reply
    1. Alpha Vulture Post author

      I don’t know if you can call a business with a few hundred million in revenue mediocre (and with decent operating profit as well these days). If you can sell that kind of volume I have a hard time reconciling that with your story of how housewives aren’t keen on hauling giant barrels of water home. I know I called the business mediocre in my post as well, but realistically, it’s not terrible. It’s perhaps just not as great as the market thought it could be some years ago.

      Reply
  2. Brian H

    They did manage to get some scale but it took 10 years to recover their IPO price…

    AV where did you exercise? IB wants to charge me $200 to exercise them which is absurd…

    Reply
  3. silver

    Hey,

    Unrelated to your last post but I wonder your opinion about how many years do you think is enough for one to be confident in his ability to beat the market ?

    Cheers

    Reply
    1. Alpha Vulture Post author

      I think that’s one of the toughest questions to answer definitely. You have to realize that outperformance is not some stationary variable. You could get better/worse as an investor and the market can also change in various ways.

      But it would say it would depend strongly on:

      1. By how much you are beating the market every year/on average.
      2. How many separate bets got you to that result.

      If you put all your money in one stock and it massively outperforms for 10 years you could either be a genius or just lucky (probably the latter). If you buy and sell hundreds of stocks/year with the same performance you are almost certainly doing something great.

      But my gut feeling would be that if you have a sort of normal diversified portfolio (20+ stocks), and your returns are not driven by one or two outliers or one underlying risk factor (e.g. leverage), a 5 year track record of decent outperformance (let’s say >5%/year above relevant benchmark) would be enough to be reasonably confident in your own ability.

      Reply
  4. Christian Olesen

    In my experience, securities that are convertible into stock usually become convertible into the stock of the acquirer, or else the issuer has to settle them with a cash payment that takes into account the loss of time value (this seems to be standard for converts). Similarly, listed options become convertible into the consideration paid (which could be 100% or partially in stock), though there is no compensation for the loss of time value in the event of a cash buyout. I guess warrants are one-off situations, but in my experience they are often structured similarly to converts. I guess it comes down to the warrant agreement. Do these warrants trade, and what’s the IB symbol?
    Thanks.

    Reply

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