Yesterday the merger of Willbros Group with Primoris Services was successfully completed. When I wrote about the merger I thought that there was little that could derail the deal, and that it would close fast, and that proved to be the case. Making a 9.1% return in two months time is as good as it gets in the merger arbitrage game.
However, just because that this deal was completed successfully doesn’t really mean that it was a good bet. I think it was, but last week I got a not so nice reminder that deals with companies that aren’t in the best financial position (like Willbros) can quickly get very ugly when things don’t go as planned. I had a position in Rosetta Genomics, a company that was flirting with bankruptcy as well before Genoptix agreed to take it over. After it (finally) managed to secure shareholder approval for the deal I thought that there was also little that could derail it, until Genoptix claimed the existence of a “Material Adverse Effect” (no details were given).
The stock has cratered since that announcement because it’s unlikely that there will be anything left for equity holders in a bankruptcy scenario. Looking back at it in hindsight I don’t think I made an error in betting on this merger, but the unfortunate reality is that there is always a small possibility of a deal failing for some unexpected reason. As long as you size your positions accordingly it shouldn’t be a problem, although it’s of course never going to be nice…
Long Willbros Group (since the cash payment hasn’t been received yet by my broker)
Last year Tejoori announced that it would liquidate. With the stock trading around $0.50/share while I estimated a NAV/share around $0.62/share I thought it was a good bet. In the end that estimate proved a tiny bit too optimistic since I got paid $0.59892/share, but I guess an unfavorable currency exchange rate is partly to blame. The liquidation distribution was paid in United Arab Emirates Dirham, and I have seen other shareholders reporting receiving a slightly higher payout in US dollars. But I’m happy to have gotten my money…
Because the company cancelled their electronic trading facility before making the liquidation distribution receiving the liquidation payout was a bit of a messy process. The depository that my broker used to keep my shares had to communicate with the liquidators in the British Virgin Islands to make sure that the money got transferred manually from Abu Dhabi to their bank account. Since that’s probably a very exceptional thing to happen, I can see how that can go wrong somewhere along the lines if someone, somewhere doesn’t fill-in the right paperwork. I like deals like this where you can’t be totally sure that everything will work out because of the paperwork, although in this case it sucked that you couldn’t do anything about that yourself. But it’s a risk that is totally uncorrelated with the market, and although at some point I will probably participate in something that will not workout, I think that as long as you get paid a big spread the overall end-result will be more than satisfactory. This one certainly was!
No position in Tejoori anymore
Yesterday the New York REIT declared a $4.85 liquidation distribution. The liquidation of the company is progressing as planned and the only two assets remaining are the Viceroy Hotel and the WWP building. They are planning to sell the hotel later this year while they will hold on to the WWP building for the next couple of years while it’s being renovated and upgraded. In connection with the successfully completed sales NYRT also paid down all their mortgage debt, and their balance sheet, pro-forma for the $4.85 dividend, is now looking as follows:
Pro-forma NYRT balance sheet, based on latest 10-K and adjusted for all dividends and sales after year-end
After the $4.85 liquidation distribution is paid, there still is approximately $1.74/share in cash left, and the sale of the Viceroy Hotel later this year might fetch around $4/share. But it’s clear that what really matters is the value of the WWP building. The building itself, listed as “investment in JV” on the balance sheet is by far the biggest piece of the pie, and additionally, the restricted cash is all earmarked to be spend on upgrading the building as well.
Author is long NYRT
Last week Conduril released their annual report for 2017 (Portuguese version only, the English translation follows later). The company is still struggling a bit, but I think there are good reasons to be optimistic. Compared to 2016 revenue was basically unchanged, while EBITDA increased from €29.1 million to €34.5 million and net income increased with 65% from €4.2 million to €7.0 million. Thanks to the higher profitability Conduril has announced to increase its dividend from €0.50/share to €1.50/share, a payout ratio of 39%.
This is of course all pretty decent, but I think the most important announcement in the annual report is that the Angolan bonds, worth €83 million, will finally be turned into cash. Last year I was already waiting for that, and it’s not yet reflected in the financials, but supposedly they were settled on March 21, 2018. Given that the company has currently a market cap of €77.4 million that’s a pretty big event. That means that they can repay the fast majority of their outstanding debt (€116.7 million in total) and the reduced interest expense should have a meaningful impact on their profitability going forward. Even after the settlement of the €83 million in bonds Conduril will continue to have a large exposure to Angola. The non-current “other financial assets” line item hides €55.5 million in debt securities that were previously classified as “assets held for trading”.
Given that the removal of Conduril’s debt could almost double its profitability I think the stock remains extraordinarily cheap. Right now it’s trading at just a 11x P/E ratio, and if we include the “other financial assets” in the NCAV figure it’s trading at a 50% discount to that number as well.
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.
Long Willbros Group