Tag Archives: WH

Exited, and rebought WSP Holdings

Just before the end of the year I exited my position in WSP Holdings. Since the (already extended) deadline for the merger agreement was 31 December 2013 I thought it was prudent to exit my position. I do think it’s more likely than not that the merger will be completed, but if there would have been a time for bad news it would have been yesterday. With the passing of the merger deadline both parties could have walked away if they wanted without paying a breakup fee. This didn’t happen, and instead the company told in a press release that both parties were in discussions to extend the deadline once again.

The share price did drop a couple percentage points yesterday, and at my entry price of $2.66/share I stand to make a 18.4% return if the merger is completed at $3.20/share. Given the multiple delays so far I do think it’s obvious that this transaction is risky, because something isn’t progressing as planned. But I do think that both parties have the intention to complete the deal, and if the intention is still there they can probably find a way to make it work. With a possible return of 20% I do think I’m getting paid enough for whatever risk it is I’m taking, but this is certainly not a big position (at the moment).


Long WSP holdings (again)

Inaction and WSP Holdings

Earlier this year I wrote about WSP Holdings. The CEO wants to take the company private, and at the time I thought that the spread between the market price and the offer price was attractive. I sold the majority of my position months ago when the spread narrowed, but I did hold on to a few shares in the expectation that the deal would be closed fairly quick.

Since then not a whole lot happened until this month when a Seeking Alpha article was published that argued that the stock was a short. Since the original planning was that the deal would be closed in the second quarter of 2013 it’s reasonable to assume that something is wrong, and it doesn’t help that the annual report has been delayed for months. The financial performance of the company was pretty poor the past two years, and with minimal break-up fees you could imagine that the CEO wants to walk away from the deal if business has taken a turn for the worse.

As a result of the article the share price of WSP Holdings dropped from ~$2.90 to a low of $1.68 while the offer price is $3.20. Yesterday the company announced that the deadline for the merger would be extended to December 31, 2013 instead of August 21, 2013 and as a result the stock price moved back up to $2.49.

Doing nothing

So what did I do when all this was going down? Absolutely nothing… Should I have sold when the deal was significantly delayed while the stock was still trading at a fairly high level? Should I have bought more when it dropped a bunch on nothing but a Seeking Alpha article?

The main reason why it was difficult to act for me was that I simply don’t know what’s going on. If the short thesis would have been built on the assumption that WSP Holdings is a fraud things would have been easy, because I’m convinced that it isn’t. The questions raised by the Seeking Alpha article were however from a different nature.

Taking a high level view there are a few things I know:

  1. The company is real (lots tangible activities outside China)
  2. The CEO had the intention to go private in the beginning of this year because you don’t waste a lot of money on lawyers for fun
  3. The deal price was (at that time) probably a good one for him since the biggest investor choose to retain his stake

With the extension of the deadline I think it’s a good bet that the intention of going private is still there. I don’t know exactly what’s going on, and why the deal is delayed, but when the stock price is moved significantly when a retail investor posts an article on Seeking Alpha I think you can be pretty sure that no-one else really knows what’s going on and how the risk of this deal should be priced.


With the stock at $2.49 and a deal on the table for $3.20 I think you will be getting paid plenty for whatever risk you are taking. So I decided to add to my position again today. I probably should have done it earlier at lower prices, but that’s easy to say in hindsight, and not a reason to not buy once you have figured out what is important and what isn’t. In the end I think most of the concerns raised in the Seeking Alpha article are just minor negatives. The single most important thing is whether or not there is still the intent to do this deal. Thanks to yesterdays press release I think the intent is still there, and what’s left is a stock that no-one dares to touch and knows how to price. Smells like an opportunity to me.


Long WSP Holdings

Bunch of quick updates (STP, WH, DSWL, SALM)

Suntech Power (STP)

With the debt maturity of Suntech’s $541 million in convertible bonds at the end of this week it’s not a surprise that this issue is getting a fair amount of attention recently. Today the company announced that it had entered a forbearance agreement with 60% of the convertible debt holders. They have agreed to not exercise their rights until May 15, 2013 if the company doesn’t pay at the end of this week. Suntech’s plan is to try to restructure the notes. My bet is that this is going to result in massive dilution for the equity. Bankruptcy as a step in between also seems like a plausible scenario since 40% of the bondholders haven’t signed the agreement. It could take some time to see how this is going to play out.

WSP Holdings (WH)

Basically nothing has changed fundamentally between 21 February, when I first wrote about the going private arbitrage opportunity, and today. We are still waiting on the SC 13E3 filing, so it’s probably going to take at least a few more months before before it will go private at $3.15/share. Despite this the price has gone up from $2.83 to $3.05: changing the potential return from 11.3% to 3.3%. Annualized that would still be decent if it’s a transaction with zero risks, but it isn’t. So I’ve decided to substantially reduce my position in the company, and I’ve sold all my shares that I bought two weeks ago.

Salem Communications (SALM)

SALM has been on fire since I bought the stock a bit more than a year ago, returning almost 170% including dividends. Intrinsic value has been moving upwards at a significantly slower pace, and while I don’t think the company is expensive at current prices it’s probably getting pretty close to fair value. At the same time SALM had grown into a big position in my portfolio. Because of this I’ve decided to sell 50% of my position last week at $6.99. I’ll keep the other half to see at what rate they will be able to refinance their debt: I expect that this will provide a nice boost to FCF.

Deswell Industries (DSWL)

I have been looking at various Chinese small caps, but in most cases I’m thinking that I simply like DSWL more because it’s profitable, the balance sheet is rock solid and the company has a long history of returning cash to shareholders. Since Deswell wasn’t a very big position to begin with I thought the logical thing to do was to add a bit to this position instead of buying into an inferior idea. Increased my position size last week by 33% at $2.51.


Short STP, Long WH, SALM, DSWL

WSP Holdings going private arbitrage

WSP Holdings (ticker: WH) is a Chinese manufacturer of tubing and drill pipes used in the oil and gas industry. Talks about a possible going private transaction have been ongoing since the end of 2011 when the company received a non-binding proposal to go private at $3.00 per share (adjusted for a reverse split). Since then there has been little news from the company, until today when it issued a press release that a definitive merger agreement has been reached and that it’s going to pay $3.20 per ADS. The company has not yet filed the form SC 13E3 so not all details are known yet, but I’m assuming that this is effectively $3.15 since there is probably a $0.05 ADS cancellation fee.

I was already long WH before the definitive merger agreement was reached, but I actually increased my position today since the risk of the deal not going through is now minimal and the spread between the current market price and the buyout price is significant. At the time of this writing the latest trade was at $2.85, implying a possible 10.5% return in probably 3/4 months time since the deal is expected to close in the second quarter.

I’m going to keep this write-up short, but to cover the main points:

  • CEO owns 51% of the outstanding shares and UMW owns 22.5%. They will both retain their equity interest in the company, and they have combined enough voting power to approve the going private transaction.
  • They have financing to fund the merger consideration
  • The financial health of the company is a bit sketchy: they have a lot of debt and actually breached debt covenants in the past. Business was bad because of US anti-dumping duties on Chinese OCTG suppliers in 2009. They have responded by building a facility in Thailand.

I don’t think that there is a significant risk that the deal is going to fall through at this point in time. The insiders know what they are buying, and if the financial condition of the company would have been a problem they would have exited the going private transaction a long time ago. Financing and shareholder approval also doesn’t seem to be a problem, so getting paid more than 10% while waiting for the transaction to close is in my opinion a very generous risk compensation.


Long WSP Holdings