Current Price – $59.5
Offer Price – $58 – $64
Upside – 7.5% or $450 for odd lot holders if priced at the upper limit
Expiration Date – 24th of October, 2017
This is a standard Dutch tender offer with shares currently trading closer to the lower limit of the tender range. Stock is listed OTC and liquidity is low. There is also ‘odd lot’ priority provision.
Contura Energy, owner and operator of coal mines in Appalachia, will repurchase $32m of stock, equivalent to c. 5% of all outstanding shares. Contura will fund the tender offer with existing cash on its balance sheet – company had $244m of cash of Q2 2017 and operations are cash flow positive.
Management (owns 5%) will not participate in the tender (from press release – “The participants in the Management Incentive Plan will not participate in the tender offer”).
My knowledge about coal industry and coal price dynamics (and even related political/regulatory/Trump landscape) is too limited to provide any valuable insights into potential valuation of CNTE and to assess whether the current tender undervalues the company. I direct readers to this write-up, which pinned CNTE valuation 100% above current levels.
In a nutshell, CNTE was formed after carving out the most valuable assets from the restructuring of Alpha Natural Resources in order to provide the most value for Alpha’s creditors. Majority of CNTE equity is owned by previous Alpha creditors (these are mostly distressed debt hedge funds). Company’s operations are profitable and so far it generates significant amount of cash (FCF of $135m in H1 2017 vs $850m enterprise value). Since the write-up met coal prices have remained stable. Company paid out $100m in dividends ($9/share) in July.
Likelihood of the upper limit pricing
In summer the company tried to launch an IPO and sell 6m post split shares (equivalent to c. 25% of the company). All the shares to be sold in IPO would have been by the selling shareholders (i.e. distressed dent hedge funds partially exiting their positions). The indicated price range was between $64.86 and $76.14. However, a month later the public offering has been withdrawn citing unfavorable capital market conditions. Two conclusions can be drawn from this:
- Firstly, bankers that were running the IPO did not find sufficient interest in the $65-$76 range – new investors were unwilling to purchase equity in this range.
- Secondly, existing shareholders (at least the ones having control of the company) were not willing to reduce the price range and sell out below $65.
The second point is obviously quite supportive of the upper limit pricing in the tender offer, especially coupled with the fact that management (and CEO with 3.5% ownership) has agreed not to participate in the offer (they were included as selling shareholders in the cancelled IPO). However, the key issue here is that decision not to lower the IPO price might have been driven by larger shareholders and some of the smaller ones might still be willing to exit the position below the $65, especially when tender offer size is only 5% of the company. Due to this I think the offer will be oversubscribed, but pricing will be closer to $64 rather than $58.
I like the odds here – upside of $4.5 vs $1.5 downside. The risk of tender offer getting cancelled outright is very low, unless there is some significant change in regulatory environment and material drop in met coal prices.