Contura Energy (CNTE) – Odd Lot Tender Offer – $450 potential upside

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

Announcement

 

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”).

 

Company background

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 However, a month later the public offering has been withdrawn citing unfavorable capital market conditions.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.

48 COMMENTS

    1. dt

      Buying 99 shares and tendering with expectation that the tender will be priced closer to the upper limit.

    1. dt

      No, i do not have stop loss. I intend to submit my shares for the tender. So unless the tender gets cancelled, $58/share is the minimum I will be receiving for my position.

  1. Noah

    IB’s saying that order of 99 shares does not meet the minimum tier size of 100. Anyone else running into this?

    1. Makarid

      Yes,i have the same problem.My broker told me that if i place a Market Order and not a Limit Order my order will be fulfilled.

  2. Kevin Cox

    That is what I just ran into. I don’t remember seeing that prohibit a trade before.

  3. jason kravitz

    I was able to buy 99 shares but when I put a limit order to sell it said the same.

    1. dt

      Not sure I understand the question. If you are asking about the likelihood of tender being priced at the lower limit, that is definitely a possibility. However, as I outlined in the write-up above I do not consider it to be likely as main shareholders cancelled the IPO when they were not able to obtain the pricing which is above tender’s upper limit. So my expectation is that they will not be willing to part with their shares at an even lower price. Having said that, because tender is only for 5% of shares, only small amount of shares need to be tendered cheaply for this tender to get priced at lower limit. As always, there are two sides of the coin and that is what makes the market.

    1. dt

      Hi Dan, it is really up to you. If you specify $64 and tender price ends up being below this figure, then your shares will not be accepted for tender.

  4. Chi Man Poon

    Interestingly it seems the Offer to Purchase documents were not found in the SEC website?

  5. Dan Silverstein

    I would caution investors not to tender without specifying a price. If enough people tender without a specific price it’s possible that the tender could go off at the low end.

    1. dt

      You should check with your broker as they might have internal deadlines when to tender.
      Overall, this offer has a guaranteed delivery clause, so tendering should be possible even on the day of expiration.

    1. Makarid

      Why a company will extend an oversubscribed tender? Have you ever experience something like this?Thanks

    2. Ralf Eckey

      Given the oversubscribed tender offer, what is you current profit expectation?

      I would have thought $64 is less likely now that 1.4m shares have been tendered.

      Thoughts?

      1. dt

        Agree, the likelihood of the tender being priced at $64 is lower now that we now that the original tender was oversubscribed. At the same time, we do not know at what price were these shares submitted for tender, maybe most were at $64/share.
        The fact that company extended the tender suggests that most of the shares were submitted at high enough price and company is expecting to attract more shareholders and subsequently lower the final tender price.

  6. Guillaume Poulin

    Could a reason for the new date be that they are trying to decrease the price they will have to pay to purchase the $31.8m worth of shares?

  7. Jed

    Now, it is extended until 12/15. Plus, as of 11/3 there were fewer shares tendered than on 10/25. Hard to say what that means since it was still 12 days from the 11/15 deadline.

    1. dt

      Another extension so early before the deadline looks very puzzling – something is happening behind the scenes that were are not aware off.

      Now the tender offer will likely end after Q3 results (expected by the end of Nov). It might be the case that management/BoD are legally obliged to wait till result announcement before finalizing the tender (in order to avoid conflict of interest accusations and etc as management/BoD obviously now the to be announced results already). Would not pay much attention to the decline in number of shares tendered to date as this figure is meaningless so early before the deadline.

      Together with tender extension CNTE announced updated 2017 guidance. The previous 2017 guidance was issued back in Nov 2016 (http://conturaenergy.com/news/contura-announces-results-for-the-period-from-july-26-2016-to-september-30-2016/). My rough calculations show that the new guidance results in c. 10% higher EBITDA than the previous one. Company still trades at roughly 2.5x-3x EBITDA for this year.

  8. AP

    Have you ever seen a situation where the amount guaranteed payout shares (odd lots) exceeds the amount of shares the company is looking to buy? What would happen in this situation – would the odd lots get pro-rated and no other shares get accepted?

    1. dt

      So far I have not seen such a case and I am quite sure this will not be the case for CNTE.
      But if that were to happen, then yes, odd-lots would be prorated and no other shares would be accepted.

      1. Dan T

        In that case it seems like it would make more sense for them to drop the odd lot priority altogether.

  9. Noah Kauffman

    DT – do you think it still makes sense to participate in this tender? The whole situation just seems bizarre. Do you think the reward outweighs the risk? Do they have any ability to modify the min. tender price below the min. they have already specified? Couldn’t they even just cancel the tender in December and start another one at a lower price?

    1. dt

      With CNTE trading below tender prices I do not see any reason to exit the position yet – if anything I would consider this to be a buying opportunity, especially for odd-lots ($100 risk free cash?) Although I agree with you, that postponement of the tender without any explanation looks very strange.

      Management can obviously modify anything or even cancel the tender, but why would they do that? Updated guidance was higher than the previous one and based on this guidance CNTE is really cheap (3xEBITDA and 4xFCF). Buying back shares at this valuation makes sense.

      Liquidity is low and market prices most likely do not represent shareholder’s sentiment towards the company.

      Also cancelling tender and starting a new one at a lower pricing does not reflect good on management – I assume they still have IPO plans in their radar and such behaviour would matter.

  10. Eli Schwab

    DT do you think it still makes sense to participate in the CNTE tender offer?

    1. dt

      As I said in my Nov 20 comment I do not think the tender will get cancelled or prices changed.
      CNTE was a clear buy (at least for odd-lots) when shares traded below $56 last week. With recent share price volatility I am really not able to tell where will the tender get priced – it is only for 5% of the company so some minority shareholders eager to exit the position might easily push the tender towards the lower limit.

  11. over2u

    In accordance with the terms and conditions of the tender offer and based on the preliminary count by the depositary, Contura expects to accept for payment an aggregate of approximately 530,000 shares of its common stock at a purchase price of $60.00 per share, for an aggregate purchase price of approximately $31.8 million, excluding fees and expenses related to the tender offer.

  12. dt

    As expected limited number of shareholders were willing to sell off in the tender (proration at 92% at $60). Most likely they attach higher valuation to the shares. With another signal (the first one was postponement of IPO) on how insiders and larger holders view valuation, CNTE shares might be interesting as a longer term investment.

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