Current Price – NOK 43.2
Expected Payout – NOK 45.65
Upside – 6%
Expiration Date – Q3 2017
Teekay Tankers (TNK) entered into definitive agreement to buy Tanker Investments (TIL). Each TIL share would be exchanged to 3.3 TNK shares – representing 6% spread at current prices and NOK/USD exchange rate. Merger has been approved by the boards of both companies as well as Special Committee of TIL independent directors. Shareholder approvals on both sides are still pending. Merger is expected to close in Q3/Q4 2017. There is plenty of borrow for TNK shares and current rate is <1%, so hedging is cheap.
TIL shares now trade at pre-announcement levels (due to continued decline in TNK shares), so it is not clear how much TIL shares would drop if the merger gets cancelled. Initial spike post announcement was +12.7%.
I will not deliberate the merits of the merger as I have too little knowledge about the tanker industry for my opinion to generate any incremental value. You can familiarize yourselves with both sides of the argument in this merger presentation, proxy statement, as well as 13D filling by an activist investor opposing the transaction.
I think the risk of TNK or TIL walking away from the transaction is very low and the key reason for the spread to exist is uncertainty regarding shareholders’ vote as well as relative obscurity of the transaction (micro-caps, Norway and only two questions on the conference call after the merger announcement).
TNK shareholder approval
Approval on the TNK side is likely a done deal as Teekay Corporation (parent of TNK) owns 55.9% of the total voting power of Teekay Tankers. Thus activist shareholder’s 10% position and objection to transactions will not have any effect. The company did not even bother responding to activists arguments. Actually, the activist seems to be more concerned with TNK’s overall ‘empire building’ strategy and continued dilution rather than specifically objecting TNK/TIL transaction (only the last paragraph of 13D addresses current situation).
TIL shareholder approval
TIL shareholder approval is more uncertain, but I believe it is likely to pass as well. TNK and its affiliates already own c. 20% of TIL stock, however merger is conditioned on the majority of the remaining shareholders approving it. The key reason why I believe TIL shareholders are likely to be in favor is that TIL was established by Teekay back in 2014 and remains fully interlinked with it, with TIL’s operations managed by Teekay and its affiliates. From 2016 annual report (which actually has 145 mentions of Teekay):
“The Company’s primary business strategies include the following: 1. Maximize cash flow and profitability by participating in pooling and time charter-out arrangements. The Company intends that the majority of Group’s Suezmax-class tankers will operate in the spot market through the Teekay operated Suezmax revenue sharing arrangement (the Suezmax RSA) <…> The Company believes that the Group will benefit from the reputation and scope of operations of Teekay, Teekay Tankers and their affiliates. The Company also projects that the cash flow the Group may derive over time from operating the vessels in these pooling arrangements or revenue sharing arrangements will exceed the amount the Group would otherwise derive by operating these vessels outside of the pooling and revenue sharing arrangements due to higher vessel utilization and daily revenues.”
Also from merger proxy statement (merger background considerations):
“The discussion included a recognition that a third party unaffiliated with Teekay Corporation or Teekay Tankers may require as a term of a possible transaction the termination of, or modification to, the TIL Management Agreement, through which Teekay Corporation and its affiliates manage the operations of TIL. The TIL Management Agreement does not provide TIL with the unilateral right to terminate the TIL Management Agreement, and therefore it was discussed that termination or modification of the TIL Management Agreement would likely require the consent of Teekay Corporation and/or the payment of a fee to Teekay Corporation. The TIL Board also considered the significant shareholdings that Teekay Tankers and its affiliate, Teekay Corporation, hold in TIL as well as that the members of TIL management are all representatives of Teekay Corporation.“
This strong dependence on Teekay was also the reason why Special Committee did not manage to raise much interest from the other parties. Proxy indicates that a number both strategic and institutional investors have expressed initial interest, but non-binding offers were received only from 4 parties, and TNK’s offer was the only one with material premium (initially 15% and later increased to 30% upon request by Special Committee).
Thus, TIL’s shahreholders clearly do not have many other choices. On a more concerning side TIL trades below its IPO price just 3 years ago and 50% below its peak in 2015. Due to this some shareholders might be reluctant to approve the merger at lower price. However, this share price slump was mostly driven by industry wide cyclicality and oil price drop. Those hoping for recovery, could hold on to their TNK shares received during the merger.