Tropicana Entertainment (TPCA) – Tender Offer – 5.5% expected upside

Current Price – $42.6

Offer Price – $38 – $45

Upside – 5.5% (if priced at the upper limit)

Expiration Date – 2nd of August, 2017

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

Tender Document

 

This tender offer seems to be a step towards Carl Icahn taking the company private. Icahn’s IEP already owns 72.5% of the outstanding shares and following the tender will have 80%-95% ownership (depending on total number of shares tendered). Due to this reason I believe that tender pricing at the upper limit is very likely and that Icahn will then buy-out the remaining public shareholders at the same price or at a premium to the tender price (although agreement was reached that IEP will not increase its ownership stake beyond 95% for the next two years).

The offer is unlikely to be oversubscribed, as there are only 6.7m shares outstanding that are currently not owned by IEP – meaning that more than 83% of the remaining shareholders need to tender in order for the offer to be oversubscribed. Taking into account that certain percentage of shareholders never participate in tenders (either not aware of it, or simply too lazy), achieving more than 83% participation level is unlikely. And if the offer is undersubscribed, then $45/share price is kind of guaranteed.

IEP itself values TPAC far higher at $54.92/share based on market comparables:

Icahn Enterprises L.P. uses the indicative net asset value of its subsidiaries as an additional method for considering the value of its assets, and it believes that this information can be helpful to its investors. Icahn Enterprises L.P. publicly reports the indicative net asset value of its subsidiaries, but cautions that such indicative net asset values do not represent the market price at which such subsidiaries trade and accordingly, data regarding indicative net asset value is of limited use and should not be considered in isolation. As of March 31, 2017, Icahn Enterprises L.P. reported the indicative net asset value of its control position in the Company at approximately $981 million or $54.92 per share. The indicative net asset value of Icahn Enterprises L.P’s control interest in the Company was determined based on market comparables, due to the lack of material trading values in the common stock. Based on such comparables, Icahn Enterprises L.P. values its control interest at 9.0x Adjusted EBITDA of the Company’s Adjusted EBITDA as estimated by Icahn Enterprises for the twelve months ended March 31, 2017.”

 

Risk:

1) Less than 2m shares tender (out of 6.7m not owned by IEP) and tender offer is cancelled due to minimum condition not met – this is a clear signal that investors consider $45/share to undervalue the company and I would expect the share price to react positively to such announcement. This would likely be followed by somewhat improved bid from IEP.

2) More than 5.8m shares tender – tender will be prorated and tender price is likely to be between $43-$45 / share. After the tender TPCA share price will most likely decrease, but it should remain above the pre-announcement $39 due to expectation that IEP will take the company fully private at the tender price or premium to it (the 2 year lock period could potentially be waived).

3) Tender could always be cancelled due to some unforeseen events.

 

Odd Lots

There is an odd-lot priority for owners of less than 100 shares, however I do not believe it to be relevant in this case as all/most the shares tendered are likely to be accepted. For those expecting that more than 83% of the remaining shareholders will participate in the offer, there is an option to avoid proration by owning and tendering less than 100 shares.

34 COMMENTS

  1. jonathan peters

    but the offer also says “not less than $38.00 per share”

    1. dt

      Correct, the potential price range for the tender is $38-$45, but as I explain above, I expect the tender to be priced at the upper limit, or at least close to it.

  2. dt

    I was asked the below on TPCA:

    “Just curious, why do u think the TPCA deal has likelihood to happen at upper limit? I get that company has suggested shares are worth 54 and it would therefore be beneficial in that regard … and I get likelihood of lower proration due to deal less likely in being oversubscribed is a good thing but language in letter sounds like company has the option to acquire 2m shares and up to 5m. So like if they can acquire 2m at 43 and 2.2m at 45 then maybe they would just do the 2m at 43. Just not seeing why it is extremely likely that the deal will go at the high end of the range. Do you have any thoughts?”

    So to clarify, the main reason why I am expecting upper limit pricing, is that more than 83% of the shareholders need to tender in order for the final price to be below the upper limit. The $54 internal valuation is just an additional kicker.
    The way I am reading the offer is that IEP must accept all tendered shares up to 5.8m, so they do not have an option to choose to purchase only the shares tendered at lower prices. This is not how Dutch tenders work.

  3. greg lia

    83% buyback is massive….odds they get to to 83 tendered very remote in my view. Yes, agree laziness, lack of awareness. But also third point: for “only” 5 percent some shareholders hold on for later date when Carl cleans this up and buys out the final amount. (Actually a very intriguing way to play this if you want to be in for a few years) As a point of reference I just completed participating in ZF tender, (not dutch) company was buying back 5 percent of shares at 98% and shares were trading close to 10 percent discount. Proration ended at close to 20%, meaning for a instant 8 percent return only one in every 4 shareholders participated. So to reiterate I think odds very very low you hit the 83% percent bar on TPCA for a 5% return. I thinks arb participation will ensure 2 million minimum is met.

  4. dt

    Apparently some of the members are concerned that IEP will arbitrary choose the amount of shares to purchase (between 2m and 5.6m) and therefore upper limit pricing is less likely.

    I think the below quote from the tender document clarifies fully that all the properly tendered shares up to 5.6m must be accepted in the tender (the only exception is if minimum criteria is not met):

    “The Purchase Price will be the lowest price per share not greater than $45.00 nor less than $38.00 per share (in multiples of $0.10) at which shares have been properly tendered in the Offer that will enable us to purchase up to 5,580,000 shares in the aggregate. If fewer than 5,580,000 (but not fewer than 2,005,000) shares are properly tendered, we will select the lowest price that will allow us to buy all the shares that are properly tendered. If fewer than 2,005,000 shares are properly tendered, we will not purchase any of the shares. All shares we purchase will be purchased at the same Purchase Price, even if you have tendered at a lower price (or are deemed to have tendered at a lower price), but we will not purchase any shares tendered above the Purchase Price.”

  5. Noah Kauffman

    Few questions – (1) only 3% of holders have filed for tender – is this typical pattern – do you really expect the remaining needed to file before expiration? (2) user above says arbs will guarantee the min is met – but volume is too low for that, it seems (3) can you point to other tenders in the past that have failed to get support so I can just check out the price action following the announcement. DT – you say it is bullish but I would just like to look at past examples where this happened to see if people that bought into the tender did not clobber the stock following the failed tender. It just seems for an illiquid pink sheets name that failing to get 2 million support could be a very real possibility

    1. dt

      (1) 3% shares tendered currently seems to be normal level, considering there is still more than a month left before the tender expiration. Majority of shareholders tender in the last week before the expiration. Just curious where do you actually see this 3%?

      (2) Agreed that volume is quite low and that arbitrageurs alone will not gather the 2m shares. However, there will certainly be some of merger arbitrageurs in this trade (your guess is as good as mine how many) and then if you assume that at least some of the remaining shareholders will be inclined to participate in the tender, then 2m mark does not seem like such a high target to reach.

      (3) From the top my head I do not recall any similar trades that failed to get the support (maybe other members can chime in on this). At the same time every situation is quite specific and you might not be able to make correct inferences about it. In this case it will all depend whether market believes IEP will increase the offer if less than 2m shares tender. If IEP comes out with the statement that they will not try to pursue TPCA any further, then the market reaction would obviously be negative.

      I share your concerns regarding minimum threshold not being reached – that seems to be the key risk here. At the same time noone so far has openly opposed the tender offer, which is a positive sign. At $45/share the deal represents 15%-20% upside to the unaffected price (and all time high) for TPCA – so i am thinking this should be enough to convince 30% of remaining minority to tender and satisfy the minimum condition.

  6. greg lia

    Point re low volume is a good one. I do think however, that lengthy tender period and high odds of upper pricing and no proration will attract enough traders to reach 2 million mark. Having said that I have been in and out of TKF which is a Turkish closed end which is liquidating. Currently have no position. They were forced to reschedule their June vote on liquidation as they had not received enough proxies. Vote now set for July, so you never know with these things.

  7. Noah Kauffman

    Thanks! Good points you two. I was reading this older post –

    http://clarkstreetvalue.blogspot.com/2017/02/tropicana-entertainment-buyback-plan.html?m=1

    In the end they say they wouldn’t be surprised if TPCA did a tender similar to Federal Mogul. Can someone give me a run down on what happened with Federal Mogul’s tender?

    At the commencement it looks like they offered 9.25.

    http://www.prnewswire.com/news-releases/icahn-enterprises-lp-announces-commencement-of-tender-offer-for-all-outstanding-shares-of-common-stock-of-federal-mogul-holdings-corporation-at-925-per-share-in-cash-300333724.html

    However on the final results it looks like they paid $10 (not sure what I am missing here).

    http://www.prnewswire.com/news-releases/icahn-enterprises-lp-announces-results-of-federal-mogul-tender-offer-300393498.html

    Can anyone fill me in on the details of this tender? It seems a bit similar in that stock had 82% of shares owned by IEH, so there wasn’t a huge avail float as is case here.

    1. dt

      Federal Mogul was slightly different – IEP tendered for all of the outstanding shares effectively taking over the company. There was a class action lawsuit filed due to price being to low and only 27% of the shareholders tendered (minimum condition was 50%). Then after few months and few extensions the offer was increased to $10 and eventually 58% of minority shareholders tendered.

      TPCA case differs:
      - Only 83% of the minority shares will be purchased and the rest potentially face 2 year window until further (and potentially higher) offer from IEP comes through. This will encourage TPCA shareholders to participate in the current offer. My guess is that IEP learned from their Federal Mogul takeover and specifically structure the deal this way.
      - Minimum condition is c. 30% of the minority shares instead of 50%.
      - No-one has yet challenged the price.

  8. Dan T

    I see an SC TO-T/A form was filed on 7/11. I don’t see any mention of odd lot pro-ration. Does this mean it was removed?

    1. dt

      This filling only highlights the changes made. The original document still stands taking into account the changes posted on any on the amendment docs. In any case I expect ‘odd-lot’ provision to be quite unimportant here as almost all of the shares tendered will be accepted (if minimum condition is met).

  9. Jed Sires

    Is the following correct?

    If I tender at no specified price, and the tender offer is not fully subscribed (but not under subscribed) I should receive $45 per share assuming one person tenders shares at $45. Thanks!

    1. dt

      Yes, that’s how Dutch tenders work.
      And that is also the main reason why I am expecting this tender to be priced at the upper limit.

      1. Federico Flom

        Assume that 3M shares tender. More than minimum 2m but less than maximum 5.8m

        If 2.9M tender at no specific price but 0.1m tender at 45. This automatically implies that 3M will be purchased at 45 ?

        IEP is not able to purchase 2.9M at whatever price they choose and just not purchase those 0.1M expensive shares?

        From your reply, it sounds as IEP is obligated to purchase every single share tendered if the amount is between 2-5.8. If just one shareholder selected 45, everyone will get that price.

  10. greg lia

    Volume last couple of days in the 65K range is encouraging, remaining spread a bit concerning with such a short runway remaining.

    1. Federico Flom

      Monday 24th volume 183.9k, certainly encouraging. Stock spent the whole day at 43.25… That was kind strange

  11. Michael

    So what should I tender my shares for? $45 or “Tender shares at No Specified Price”? Sorry if I missed the precise instructions, if they were in the article.

    1. dt

      If you tender at $45 you risk that they will not be accepted if the tender is oversubscribed and eventual tender price ends up below $45/share (low likelihood). If you tender with no specified price and you are guaranteed that your shares will be accepted for the tender, at least the prorated part.

      If the tender is priced at $45 then both of your choices would deliver the same result.

      Hope this helps.

      1. Michael

        Thanks. The rules were already discussed earlier in the thread. My question was more about the inner value and the optimal strategy for the case that the tender price will unexpectedly be lower than $45.

  12. Federico Flom

    Thoughts on how overall volume is going so far in terms of 2m min participation risk ?

    1. dt

      Since the tender was announced the daily volume spiked up materially (4x on average) and overall 1.4m shares changed hands – at unaffected daily volume it would have been c 0.35m shares, thus an incremental 1m shares have traded since the announcement. I am guessing this indicates that either arbitrageurs are getting into this special situation or that daily traders are speculating with tiny TPCA movements due to downside protection. Both of these support the notion that 2m share minimum condition will easily be met.

      So my take on the likelihood of the tender going through has not changed. What is a bit worrying is that price seems to be stubbornly stuck at $43+ instead of moving closer to $45. So I might be overly optimistic on some aspects of this situation. A good case for caution is recent tender of QIWI (https://www.specialsituationinvestments.com/2017/06/qiwi-plc-qiwi-tender-offer-13-upside/) where minimum condition was not met despite significant premium.

  13. greg lia

    finally broke thru the 43.25 seller. Must have unloaded over 100K shares at 43.25 last few days. Lets see if its off to the races or more supply coming?

  14. Federico Flom

    I wouldn’t be too concerned that TPCA is at +43. CSFB recently sent an analysis on dutch tenders:

    As can be seen in the below comp table, the median participation rate for Dutch Tenders at least $1B in size has been about 15%, with a median clearing price at the top of the range and a 3.8% premium to the VWAP during the offer period. The premium relative to the price at the expiration of the offer is a bit smaller at ~2%, but notably, none of these precedents have priced at a discount to the close

    Seems to me the current premium is in line to other tenders

  15. Noah Kauffman

    What’s your rec for price to tender shares at, assuming you don’t own a huge amount of shares? Seems like if Min condition is met it should go at high end. Is there any big risk at tendering at the max price range versus some level below it?

    1. dt

      I am personally tendering at $45, but I also think that if minimum condition is met then the tender will be priced at $45, with both options (specified or no specified price) resulting in the same outcome.
      If my shares will not be accepted for the tender I will simply wait for IEP to buy out the remaining shareholders at an even higher premium, even if that takes 2 years as per current agreement.

  16. Dan T

    Is there any chance they raise the upper limit of the tender between now and expiration?

    1. dt

      There have been tenders were the price was raised due to low participation – even IEP has increased the offer for Federal Mogul (see comments on the 29th of June),
      So clearly a possibility, but I would not count for it.

  17. greg lia

    I would not count on it either, however anxious to see where price settles after tender. Will be very low float and could see wide bid ask spreads, but one would think Ichan will want to get the remaining small percentage in two years when he is allowed. Patience could be well rewarded if there is a nice entry point next week.

  18. dt

    As expected tendered shares were accepted for $45/share, 5.5% return in a month.
    And as only 3.1m shares tendered (out of 5.6m maximum limit) share price shot up in expectation of higher subsequent offer from IEP and sign that big part of shareholders also value the company higher. However, IEP is locked from making any further offers for TPCA shares at least two years, so we will see if they find a way around it.

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