Resources Connection (RECN) – Odd Lot Tender Offer – 10% upside

Current Price – $14.51

Offer Price – $13.5 – $16.0

Upside – 10% or $150 (if upper pricing limit is used)

Expiration date – 15 November 2016

No proration for holders of less than 100 shares

SEC Filling

 

Summary:

Resources Connection offering to purchase up to 6,000,000 Shares in the Offer, which represents approximately 16.6% of the issued and outstanding Shares as of October 12, 2016. Upon the terms and subject to the conditions of the Offer, we will determine a single per Share price that we will pay for Shares properly tendered and not properly withdrawn from the Offer, taking into account the total number of Shares properly tendered and the prices specified by tendering stockholders. We will select the lowest purchase price, not greater than $16.00 per Share nor less than $13.50 per Share, that will allow us to purchase up to 6,000,000 Shares or a lower number of Shares depending on the number of Shares properly tendered and not properly withdrawn.

 

How likely is the pricing at the upper limit?

For most of 2016 RECN shares traded at $15+ per share, and for most of 2015 at $16+ 015. The share price dipped in Oct (and then rebounded yesterday following the tender announcement) after company released Q1 FY2017 results and CEO unexpectedly resigned.

The results were actually in line with the guidance that the company gave back in July during Q4 conference call, thus most likely the sell-off was caused by the departure of CEO which comes only few months after the departure of CFO. Investors are clearly concerned that something might be rotten if top executives are leaving the ship. CEOs departure was due to health issues, and CFO simply retired (at the age of 55).

However, I believe investor concerns are overblown – so far the company has served shareholders well. All free cashflow over the last years has been returned to shareholders via buybacks and dividends. Share-count went down from 45.5m in 2011 to 37m currently. Company continues to generate c. $35m of operating cashflow with minimal capex (it is consulting business). Current enterprise value stands at $424m, so the company is trading at 12xFCF, which I consider quite cheap.

My guess is that concern about executive departure was temporary market overreaction and that participating in the tender at current prices is quite safe. I doubt shareholders will be willing to tender shares at current levels ($14.5) let alone the lower limit ($13.5), which would actually be the lowest RECN has traded over the last two years.

 

No proration for odd lot holders:

For purposes of the Offer, the term “odd lots” means all Shares properly tendered at prices at or below the Final Purchase Price held by a stockholder who owns beneficially or of record an aggregate of fewer than 100 Shares. Odd lots will be accepted for payment before proration, if any, of the purchase of other tendered Shares.

 

Source and Amount of Funds:

If 6,000,000 Shares are tendered in the Offer at the maximum purchase price of $16.00 per Share, we expect the maximum aggregate cost of this purchase, including all fees and expenses applicable to the Offer, to be approximately $97.1 million. We intend to use up to $50 million of cash and cash equivalents on hand to purchase Shares in the Offer and to pay all related fees and expenses and will fund any remaining purchase of Shares in the Offer using funds borrowed under the Credit Agreement. The Offer is not conditioned on obtaining financing or on any minimum number of Shares being tendered.

13 COMMENTS

  1. will morrissett

    This email came through on time for me this tiume.
    Thanks for the high frequency lately!

    1. dt

      You are welcome. Frequency does not depend on me, it is purely driven by opportunities in the market. So do not be surprised with few weeks of no ideas at all.

  2. Jerry Christopherson

    so I buy 99 shares at 14.50 and the have the right to tender as high as 16/shr or less, my choice?
    Not sure I see any risks. Could you comment?

    1. dt

      Hi Jerry. How Dutch tender offers work is that a single tender price is determined after expiration. This tender price is set so, that by cashing out everyone who tendered at or below that price, the company can achieve its target, which is the case of RECN is 6m shares. The price might end up at the lower limit if many shareholders are willing to get rid of their shares, or at the upper limit if shareholders are reluctant to tender at low prices. The cash-out price is the same for all shares accepted to the tender, disregarding at which price specific shareholder agreed to tender his/her shares. The only rule is that tendered price <= eventual cash-out price.

      The strategy that I usually follow with odd-lots is to tender the shares at the lower limit, which gives guarantee that my shares will be bought out disregarding the eventual cash-out price. So if i have 99 shares and tender them $13.5 and the eventual cash-out price is set at $16, then I will receive $16 for each tendered share. If you tender at $16, but eventual cash-out price ends at at $15.5, then all your shares will be returned back after the tender. Another option is to tender the shares at the price you bought ($14.5), but then you need to believe that if you shares are not accepted (i.e. cash-out price <14.5), then you will need to liquidate the position in the market, where prices are also subject to fluctuations.

      So to sum up the risks are:
      - the deal is cancelled – have not seen this for Dutch tenders, but anything can happen.
      - eventual cash-out price is set below your tendered price and your shares are not accepted for the tender (avoid this by tendering odd-lots at lower limit).
      - eventual cash-out price is set below the price at which you bought the shares (eg. $13.5 vs $14.5) and you suffer losses on each tendered share.
      - more shares tender than are accepted for the offer and proration takes place – this one is avoided by having odd lots.

      Hope this helps.

  3. dt

    I closed my RECN position today, as prices approached the upper limit. Closed at $15.6/share.
    7.6% return in 3 weeks.
    I might buy again and tender if RECN share price drops.

  4. Jeremy Neill

    Quick question, DT. Do you sometimes close out positions like this early because 1) you become less confident that the upper pricing limit will be selected (i.e. $16), 2) you think the share price will drop for some other reason, or 3) you think the tender will be cancelled? Or some combination of all three? Also, I don’t know how to tell for any particular odd-lot whether shares need to be settled by the tender date, but if they do for RECN then because it’s the 15th if you sold them they presumably would have needed to be repurchased by today, right (i.e. 3 business days)?

    1. dt

      Hi Jeremy, my answers below:
      - I tendered mainly because the risk of something going not according to my initial plan is no longer worth the remaining return. I did not become less confident neither in upper limit pricing nor in tender cancellation (I have not seen any of the Dutch tenders being cancelled). The biggest risk is obviously the eventual tender price. When I bought the shares I had $1.5 upside per share if the upper limit is chosen, yesterday only $0.4/share was left. At the same time, if the tender is priced at somewhere in the middle, at the time of purchase I did not risk losing anything and at yesterday’s prices I would be down somewhere around $1/share. So expected return went down and potential downside increased. Basically if the share price is getting close to the upper limit it is always worthwhile liquidating (if you were in it just for special situation) unless you are 100% sure that the upper pricing limit will be used.
      - look for ‘guaranteed delivery’ clause in the tender documents. If there is one (almost all of the tenders have it) it means that shares can be purchased in the morning of the day of the expiration (at least through IB) and then tendered. If there is no ‘guaranteed delivery’ then shares need to settle before expiration, meaning they need to be bought 3 business days in advance.
      Hope this helps.

  5. Elliot Nussbaum

    Do you lose the odd lot preference if you indicate a price?

    1. dt

      You do not loose odd lot preference. However, if the final tender price will be lower than what you indicated then your shares will not be accepted for the tender.

  6. AlexP

    This went ex-dividend today. I wonder if those that held into the tender will get $0.11 dividend.

    1. dt

      Of course. those who had shares at the close of business of 14th of November, will get dividend.

Comments are closed.