Great Elm Capital Corp (GECC) – Odd Lot Tender Offer – 8.5% upside

Current Price –$11.2

Offer Price - $11.5 – $12.17

Upside – 8.5%

Expiration Date - 3rd of May, 2017 (expected)

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

Press release


Background

Great Elm Capital Corp announced its intention to commence a modified “Dutch auction” self-tender offer to purchase up to $10,000,000 (c. 7% of outstanding shares)  of its common stock, at a price per share within the range of $11.50 to $12.17. The tender offer is expected to commence on or about April 3, 2017.

Shares currently trade below the lower limit, so odd lot holders get a risk free $30 + a free option that the tender will be priced at the upper limit.


No proration for odd lot holders

Tendering stockholders whose shares are tendered at or below the purchase price owning fewer than 100 shares, or “odd lot” holders, will have their shares purchased without proration and all other tendered shares will be purchased on a pro rata basis.


Likelihood of the upper limit

Only 7% of the outstanding shares will be purchased, so I expect the proration to be high and most likely the tender will be priced at the lower limit. NAV per share stands at $13.52, thus the company is trading at material discount to BV, which might make some shareholders reluctant to tender (management indicated they will not tender). On the other hand business development companies tend to trade at discount to BV and current 15% discount to NAV might be deserved.

16 COMMENTS

  1. Michael

    looks like you can collect a $0.083/share dividend here, too.

    1. dt

      Indeed. The April dividend should be distributed before the tender expiration.

    1. dt

      That’s the idea. Buy 99 shares to avoid proration and tender all at the lowest price limit. If the tender is not cancelled, this trade would result in at least c. $30 (before any broker commissions, including dividend) + one gets a free option if the tender is priced at a higher limit.

  2. FM

    Still did not receive tender offer from IB. Did you receive?

    1. dt

      Not yet. Usually IB takes a week or a bit more from the tender announcement to send out the forms. So all seems to be normal so far. If you are still concerned, you can always chat to them and they should explain the situation.

  3. work 22

    i got mine from Schwab yesterday. Tendered today.

  4. Michael

    IB offers, among others, “Tender shares at No Specified Price (NSP)”, and “Submit shares for tender at Bid Price: 11.50 USD” (the lowest level). Which ones should one select for our strategy?

    1. dt

      There is no difference in submitting at “Tender shares at No Specified Price (NSP)”, and “Submit shares for tender at Bid Price: 11.50 USD”. Both of these will result in the same outcome.

  5. mcg mcg

    I”m curious why this was outlined as “Buy 99 shares to avoid proration”. My read indicates that odd lot holders might be subject to proration at the companies discretion.

    1. dt

      mcg, well spotted! It did not say so in the initial press release and the words ‘may’ and ‘maybe’ only appeared in the SEC tender filling. And so I missed these.

      My guess is that company put in this clause to avoid a situation where it is only able to cash out the odd-lots. However, keeping in mind the low absolute return potential ($20-$70 for odd-lot accounts), I would expect relatively low number of odd-lot accounts and in turn priority treatment. In any case, pre-tender announcement price was $11/share, so downside in case of proration is quite small.

      Now really interested to see how this plays out. Also the SEC filling sounds quite funny – from FAQ part:

      “If I own fewer than 100 Shares and I tender all of my Shares, will I be subject to proration?

      Maybe.”

  6. greg lia

    If this deal goes off at 11.50 the company is buying back 7% of the float at a 15 percent discount to NAV. This will result in an increase in the NAV by about 1 percent…..so if the market applies the same discount as it did prior one would think 11.10 would be an apples to apples comparison…..who knows….hopefully see results Monday. Certainly was some strange trading on Friday with the stock

  7. Noah

    Looks like 11.50 and no proration for odd lot holders.

    “In accordance with the previously announced self-tender offer to purchase for cash up to $10 million of its common stock outstanding, the Company expects to repurchase 869,565 shares, representing 6.94 percent of its outstanding shares, for payment on or about May 10, 2017 at a price of $11.50 per share on a pro rata basis, except for tenders of odd lots, which will be accepted in full, for a total cost of approximately $10 million, excluding fees and expenses relating to the self-tender offer.”

    https://www.sec.gov/Archives/edgar/data/1675033/000119312517162498/d396749dex99a5e.htm

    1. dt

      Indeed. Still this ‘Maybe’ in the filling for odd-lot proration sounded interesting – my guess is that going forward this ‘maybe’ will become more often.

  8. greg lia

    While the tender is over, there is an interesting dynamic occurring at the moment with Great Elm. For the arbs who participated in the deal. (aside from the odd lots) it was a complete flop. Only 11% of shares tendered were accepted and those were accepted at the minimum price. I believe these arbs are in the market, (albeit volume is not heavy) attempting to get rid of the 89% of shares that were returned to them Friday night. On the filp side, the company announced earnings and NAV Friday and grew NAV from 13.52 to 13.59 during the first quarter while at the same time paying out a near 10% div of 25 cents. The company’s purchase of 7% of shares outstanding at a 15% discount, (the tender) adds yet another 14 cents to NAV, so we are now in the 13.73 range. With a price of of 10.76 you are looking at a current discount to NAV of 21.5%. If the discount reverts to more historical norms, once the arb selling is done, the stock could well be trading in the mid 11′s. On the conference call management reiterated the 25 cent dividend for next quarter and their commitment to ongoing buybacks.

    1. dt

      Greg, worth paying attention to couple of points with regards to GECC:
      - It is a BDC which tend to trade at a discount to NAV. And the size of the discount varies case by case.
      - Management fees together with incentive fees are excessive, c. 4% per annum.
      - Almost a third of NAV is in Avanti Communications PLC (satellite communications company), which continues to burn cash and is heavily indebted. Judging by its share price it is not performing in line with expectations. So my guess is that these loans have a decent chance of not being paid off.

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