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%.
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.