Current Price –$46.86
Offer Price – $43 – $48
Upside – 2.5% (if priced at the upper limit)
Expiration Date – 24th of May, 2017
This is a tender offer with shares currently trading in the middle of the buyback range. Tender offer has high likelihood of being priced at the upper limit and proration is expected to be low. There is no proration for odd-lot holders.
Background
CIT Group is returning cash to shareholder following completion of its commercial aircraft leasing business. The company is offering to purchase Shares for cash up to $2,750,000,000, at a per share price not greater than $48.00 and not less than $43.00.
If the Offer is fully subscribed at a Purchase Price of $48.00, the maximum Purchase Price pursuant to the Offer, the completion of the Offer will result in the repurchase by CIT of 57,291,667 Shares, which would represent approximately 28.26% of our issued and outstanding Shares. If the Offer is fully subscribed at a Purchase Price of $43.00, the minimum Purchase Price pursuant to the Offer, the completion of the Offer will result in the repurchase by CIT of 63,953,488 Shares, which would represent approximately 31.55% of our issued and outstanding Shares,
The offer expires on 24th of May, 2017.
No proration for odd lot holders
The term “odd lots” means all Shares tendered at or below the Purchase Price by any person (an “Odd Lot Holder”) who owned beneficially or of record an aggregate of fewer than 100 Shares. Odd lots will be accepted for payment before any proration of the purchase of other tendered Shares.
How likely is the upper limit pricing?
Company is buying almost one third of the outstanding shares, meaning that if less than 1/3 of all shares are tendered the offer will definitely be priced at the upper limit. Shares are currently trading approximately at tangible book value which seems reasonable valuation for a banking company with with ROTCE of 7%-8% (pro-forma for capital return) and no growth in tangible equity. Following the tender the company will still have further $0.5bn of authorized capital for potential return to shareholders through dividends and buybacks, thus ROE profile is likely to improve further as over-capitalization is adjusted. With banking environment improving (higher interest rates and Trump’s deregulation) an argument could be made that banks with similar ROTCE profiles should be trading at a slight premium to their book value. Thus it does not seem that CIT is overvalued at the upper limit and I would not expect shareholders to be very eager to separate with their shares at these prices.
This suggest that proration will be low and the tender offer has a high chance of being priced at the upper limit.
No position at the moment as I find 2.5% return not worth the risk. There might be better opportunities to enter this before the tender expires.
If proration will be low, wouldn’t you expect the risk to be higher of it being priced lower than the upper limit?
Daniel, quite the opposite – the lower the proration, the higher likelihood that shares will be accepted at the upper limit. E.g. imagine that exactly 57m of shares tender in the offer which would mean zero proration – to buy out all the tendered shares the company would need price the tender at the upper limit. However, I am not suggesting this will definitely happen, just offering arguments why upper limit pricing is likely in this case.
Hope this makes it clearer.
How many shareholders are there currently and what are the possibilities that there won’t be many odd lot holders?
Thanks for the clarification.
Proration factor for the tender offer is approximately 88.2%. And the offer price falls on the upper limit. Why is that possible? Could you please clear my doubt? Thanks.
e.g. assume 50% of shares tendered at the lower limit and the other 50% at the upper limit. If the company wants to buy 50%+1 share it will need to price the whole offer at the upper limit, even-though proration would be close to 50%. So dutch tenders are always carried out at the price at which the last (most expensive) share necessary to fill tender requirement was submitted.