Trez Capital Mortgage Investment (TZZ) – Odd Lot Tender Offer – Free Option

Current Price – C$7.99

Offer Price – C$8.0 – C$8.3

Upside – 4% (C$30 for odd lot holders)

Expiration Date – 14th of Feb 2017

No proration for Odd Lot Holders (99 shares and less)

SEDAR Filling

This is a tiny opportunity in Canada. Currently the shares trade one cent below the lower limit and thus odd-lot holders are guaranteed that their shares will be purchased at least at the same price in one month.  This is a free option on any potential share price appreciation in the meantime or tender being priced at the upper limit (I consider the later to be unlikely).

Background

Trez Capital Mortgage Investment Corporation offers to purchase class A shares having an aggregate purchase price not exceeding $35,000,000. The purchase price per Share will not be less than C$8.00 and not more than C$8.30. This purchase offer represents c. 25%-26% of all outstanding Company’s stock.

In Sep 2016, company launched a similar tender to buy 2m shares at C$8.5 per share. The offer was heavily oversubscribed with proration factor of 27%. Although the tender price is lower this time, I would assume the offer will be oversubscribed again and tender is likely to be priced at C$8.0.

No proration for odd lot holders

If a Shareholder owns in the aggregate fewer than 100 Shares (an “odd lot”) as of the close of business on the Expiration Date and that Shareholder validly deposits all such Shares pursuant to an Auction Tender at a price equal to or less than the Purchase Price or pursuant to a Purchase Price Tender, the Company will purchase all of those Shares without proration

Source and Amount of Funds

The Company will fund any purchases of Shares pursuant to the Offer from available cash on hand.

Tax treatment

Often distributions received from Canadian tenders are treated as dividends and in turn cause withholding tax burden on foreign shareholders. As per below, distributions received from tendering Trez Capital Mortgage shares will be treated as sale of shares and thus there should be no additional taxes (as compared to US tenders).

A Non-Resident Shareholder who sells Shares to the Company under the Offer will be deemed to receive a dividend equal to the excess, if any, of the amount paid by the Company for the Shares over their paid-up capital for Canadian income tax purposes except to the extent the Company elects in prescribed form to treat such amount as a capital gains dividend. The paid-up capital per Share as at December 31, 2016 was approximately $9.65, taking into account the distribution as a return of capital payable on January 16, 2017. As a result, the Company expects that Non-Resident Shareholders who sell Shares under the Offer should not be deemed to receive a taxable dividend or a capital gains dividend for purposes of the Tax Act.

10 COMMENTS

  1. Thomas Meng

    Hi, I have purchased 99 shares of TZZ in IB yesterday. But I haven’t received the corporation actions of tender offer as usual so far. I am wondering if there is anything changed? Thanks!

    1. dt

      It might take longer than one day. You can always look up any corporate actions under Support >> Tools >> Corp Actions.

    2. Andrew Davis

      I have a similar issue. I purchased 99 shares on 18 January. I have just checked my IB Corporate Actions and do not see this tender there.

      1. dt

        I checked with IB support. They have info on the tender and should put it through the systems shortly.
        Last day to buy shares for tender is 2017-02-09

  2. Heiko Knapp

    If share price at the time of writing of this article was 7.99, and the investor gets 8.00 from the tender offer, then why is the “upside” 4%? Is it not 1/8 %?

    1. dt

      Heiko, in the headline I indicated the potential upside if the transaction is priced at the upper limit (C$8.3). As you are buying below the lower limit, you get the Free Option on any share prices increases during the tender period and on possibility that tender will be priced at the upper limit. If none of these options materialize, then one simply gets the money back by tendering at C$8.0.

      Hope this clarifies it.

  3. brian walsh

    After you purchase TZZ, are you tendering them right away or are you waiting?
    When is the last day you can tender?

    1. dt

      Brian, it does not matter whether you tender right away or wait – one can always change decision before the tender expiration. For TZZ the expiration date is 14th of Feb, but you might need to tender before that. Check with your broker on the final date/time by which you need to submit your choice.

  4. dt

    This turned out far better than expected – shares were purchased in the tender at C$8.3 (I was expecting C$8.0) and also 88% of the tendered shares were accepted, so this was a good deal not only for odd-lots.
    This was free option (no cost, no downside but potential upside) opportunity where the option value materialised.

    Overall. including dividends this resulted in 4.5% return in a month.

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