OCI Partners (OCIP) – Merger Arbitrage – 5.3% upside

Current Price –$7.5

Offer Price - $7.9

Upside – 5.3%

Expiration Date - TBD (expected Q1 2017)

 

This is a merger arbitrage situation, where current acquisition proposal understates the value of the company and the risk of deal getting cancelled is low. The spread is at 5.3%.

Background

The press release of the merger proposal is here:

“OCI N.V. (Euronext: OCI) (“OCI”) today announced that it has submitted a proposal to the board of directors of OCI Partners LP (NYSE: OCIP) (“OCI Partners”) to acquire all publicly held common units of OCI Partners in exchange for OCI N.V. shares. OCI currently owns 79.88% of issued and outstanding common units of OCI Partners. OCI is proposing an exchange ratio of 0.5200 OCI N.V. shares for each publicly-held unit of OCI Partners, (the “Exchange Ratio”), as part of a transaction that is to be effected through a merger of OCI Partners with a wholly-owned subsidiary of OCI.”

Merger presentation is here.

OCI NV currently trades at 14.2eur, meaning that for each share of OCIP one gets the equivalent of 7.38eur or $7.92 at current exchange rates, resulting in 5.3% spread.

Why the deal is likely to close

  • OCI NV already owns 80% of OCIP and they are just taking out the public shareholders.
  • Merger is subject to OCIP shareholder approval but all shares are counted, including those owned by OCI NV. So the approval is guaranteed.
  • OCIP is cheap as the earnings over the last few quarters have been depressed due to low methanol prices, which have rebounded strongly over the last few months. On forward looking earnings OCIP trades at single digit PE.
  • Sawiris Nassef – CEO and 50% owner of OCI NV – has been actively buying OCIP shares in the open market – another confirmation that OCIP is cheap.

Basically, OCI NV and Nassef are using the last opportunity to buy out OCIP shareholders cheaply and in my opinion merger proposal significantly undervalues the company. And I do not see them willingly walking out of the transaction.

The only way this deal gets cancelled is if OCIP Board or Conflicts Committee (formed by OCIP board) rejects it. However, that would be hugely positive for the OCIP stock, because OCI NV would need to increase the offer price to buy out minority holders. This year saw a number of such transaction where Sponsor had to increase the price to buy out public shareholders. By buying OCIP now, investors get this optionality for free.

The proposal itself with no minority shareholder vote is clearly conflicted and undervalues the company, but I am not sure whether the Conflicts Committee and OCIP BoD will care for minority shareholder interests.

Shorting OCI NV

To capture the spread fully investors need to short OCI NV (listed in Amternam). Otherwise investors are exposed to fluctuations in OCI NV price as well as EUR/USD exchange rate. The borrow fee currently stands at 6% - I expect the deal to close in one quarter or sooner, so the borrow costs are likely to eat c. 1%.

I have unhedged OCIP position.

10 COMMENTS

  1. Jinfeng Zhai

    I think the ticker in the brackets may be OCIP instead of OCI, isn’t it?

  2. dt

    I closed my OCIP position today at $8.35 per share, resulting in 11% return over two weeks. High return was driven by run-up in the share price of OCI NV as a result of which OCIP also increased (all OCI shareholders will get 0.52 shares of OCI NV for each share of OCIP).

    I entered this trade for M&A spread play and 5% gain – the spread remains unchanged but my gain is already double of what I expected, so I am simply taking money of the table and moving on. The thesis is still as good as before for the M&A spread play.

    The obvious question is – was I simply lucky with this one as my gain was not caused by narrowing of the spread. And the answer is yes, but only to some extent. OCI NV is acquiring OCIP cheaply and at the time when when methanol industry just started to turn upwards from the cyclical lows. So this acquisition is likely to result in significant value for OCI NV shareholders and this is potentially being reflected on OCI NV share price.

  3. dt

    Current OCI/OCIP spread stands at 6.5% with the deal expected to be closed in Q1. Borrow fee on OCI is lower than at the time of write-up at 2.9% (through IB).
    I see very limited risk of this deal being cancelled (OCI already owns 80% of OCIP) and will open a hedged position to take advantage of the spread (long OCIP and short OCI).

  4. dt

    Today the spread has narrowed to less than 1% and I have closed my position in OCIP and OCI NV.

    6% return for my second run on this M&A arbitrage on top of 11% return previously (I closed unhedged OCIP position in mid December). So the total return is 17%.

    Obviously, those who had unhedged OCIP position till today, enjoy total return of 32%.

  5. dt

    I was expecting update on OCI/OCIP transaction with Q1 results. That did not happen and the spread has widened again. Now it is at 4.5%. No position at the moment.

    Interestingly, management noted: “The proposed transaction is subject to the negotiation”, which I read as a possibility that exchange ratio has a chance of being increased.

    This was seconded by the comment of one of the investors, who argued that deal significantly undervalues OCIP and expressed hope that Conflicts Committee will renegotiate better terms.

    “Okay, I appreciate your comment about not being able to answer questions regarding the current proposal from OCI N.V., but from our perspective as someone that has an economic interest in the common units, I have to say that we are perplexed and concerned with the fact that there has been nothing that’s come out of the company with respect to pointing out the opportunistic nature of the proposal and the fact that the economics proposed are holding adequate when we look at what the company can do in terms of free cash flow generation and the fact that we have turned the corner on both ammonia and methanol prices. I mean, on our numbers, even if you assume that you are not picking interest on the intercompany loan but that you are paying cash interest, you should do about $1.67 in cash flow distributions this year. And in which way you cut it, the current proposal which is for $10.42 today is significantly undervaluing the company and you can make a reasonable argument that the price should be close to double what is being offered. You are trading at a 30% discount to Methanex which is a historical collaboration and Methanex doesn’t have the benefit of an MLP structure. And if we look at some of the other MLP costs that are trading at 8%, 9%, 10% yields and you assume $1.70, $1.67 type distributions and the fact that we are still in the early part of the cyclical turnaround of both of those commodities, it’s just – we are perplexed why the company is even engaging in discussions at these levels. If the answer is that the number should be materially higher and in the range of fair value that’s a different thing, but the fact that the company hasn’t said anything about the opportunistic nature and the inadequateness of the current proposal, it’s externally concerning to us. And so we would hope that the Conflicts Committee is the only one that is not hopelessly conflicted in this process stands firm when it comes time to figuring out what the appropriate value is here. And if we can get to the right value, there is nothing wrong with the company remaining independently publicly traded and having the benefit of the future free cash flows to its current common unit holders. Thank you.”

  6. dt

    Acquisition agreement has been terminated. Apparently, conflicts committee established by the OCIP board did not find an agreement with OCI NV. I read it as an indication that price was too low. As the negotiations have been ongoing for a while and still no agreement was reached, my guess is that OCIP demanded far higher price not just an incremental 10%-20% increase. The conflict committee seems to have acted in the best interest of shareholders.

    So far my strategy of closing out M&A position once the spread narrows significantly instead of waiting for the deal to close has paid off handsomely (learned a lot from RAD investment).

    http://ocipartnerslp.investorroom.com/2017-04-17-OCI-N-V-Terminates-Negotiations-to-Acquire-All-Publicly-Held-Common-Units-of-OCI-Partners-LP

    In the write-up I indicated:
    “The only way this deal gets cancelled is if OCIP Board or Conflicts Committee (formed by OCIP board) rejects it. However, that would be hugely positive for the OCIP stock, because OCI NV would need to increase the offer price to buy out minority holders. This year saw a number of such transaction where Sponsor had to increase the price to buy out public shareholders.”

    That’s exactly what happened, but OCIP shareholders have reacted negatively and shares traded down 15% since the announcement. I think this was overreaction potentially driven by some arbitrageurs exiting the trade. It is not clear if OCI NV will still come back with a higher offer – most probably not in the short term.

    But with board acting in the best interest of shareholders and likely undervaluation (see comment above), OCIP looks quite attractive as a long position. Increased distributions would serve as a catalyst. I am currently investigating this further.

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