Greenhill & Co (GHL) – Expected Tender Offer – Upside TBD

Current Price – $18.65

Offer Price – TBD

Upside – TBD

Expiration Date – TBD

 

This is the follow-up on the GHL tender offer that I posted couple weeks ago. I think that a new type of special situation has presented itself and therefore I am flagging it as a separate post.

GHL has launched recapitalization program whereby it wanted to replace expensive equity with cheaper debt. The financing was arrange for $285m of stock repurchases. Out of this $207m were for the 12m shares tender offer (40% of all outstanding)  that ended up significantly undersubscribed – only 3.5m shares tendered at $17.25. For possible reasons why the tender ended-up undersubscribed please browse through my previous post.

So now we are in the situation where management wants to recapitalize the company and still have $225m to do that (compared to market cap of $490). I do not think management will simply abandon this plan as it was presented as the key in company’s turnaround. One of the potential outcomes is that another tender offer at a higher price will be launched – share price rally after the tender result announcement seems to indicate that market is expecting this. If a new tender is announced it is likely to be at a premium to the current share price.

At the moment this is just a speculation, but I would expect management to announce something shortly, potentially after the final results of the tender (currently only the preliminary ones are available).

Also for anyone interested in this speculation, I would strongly suggest to read through this bearish thesis on GHL (was just published yesterday). I agree with the arguments author makes and would not be comfortable holding GHL for anything but a short term trade.

No position at the moment.

22 COMMENTS

  1. Sean McMahon

    Thanks for the update. With the stock price falling from $19.50 to $18.10 over the past 3 days can’t hurt the likelihood of another tender.

    Also, unrelated note, but I resubscribed recently, and love that comments can now be posted on each idea. It certainly cultivates more of a feeling of community, and makes you seem more accessible and engaged (meant solely as a compliment on the present, not a criticism of the past). Anyway, thanks for the great site, and keep up the good work!

    1. dt

      Thanks for kind words.
      If GHL drops below $17, then I think it would be a clear buy as I do not see management announcing tender below the price of the previous one.

  2. dt

    Yesterday I have opened GHL position at $17.6/share.

    I think management will push forward with recapitalization plan one way or the other. They simply must as otherwise GHL risks damaging own reputation – if GHL is not able to carry out their own recapitalization what does it say about the quality of investment banking services they are offering for others?

  3. dt

    Q4 results are out – and these were quite disappointing in line with the whole of 2017. The drop in revenues was larger compared to the rest of the year, however quarterly loss was mostly the result of non-operating adjustments and expenses. Chairman was optimistic about the start of 2018.

    https://www.greenhill.com/sites/default/files/earnings_release_q4_2017_final.pdf

    During the conference call the following was mentioned about continuation of recapitalization plan:

    “Accordingly, as of year-end, we had approximately $219 million remaining under our share repurchase authority. Clearly, we have so far made less progress than we had expected to in our share repurchase plan. This was influenced by two facts.

    First, shareholders mostly chose not to sell into our tender offer, which was set at a 20% premium to the share price prior to the announcement of our plan. Then second, the price of our stock further increase more quickly into a higher-level than we had expected when we put in place a formulaic 10b5 open market share repurchase plan, which has just recently expired just before the recent market correction starting a few days ago.

    Going forward, we will seek to accelerate progress on our share repurchase plan, while still maintaining a disciplined approach to the manner and timing of repurchases.”

    “Now I’ll take that for some degree as a compliment that people didn’t want to sell at those prices. We then put in place, say, 10b5 open market purchase program and the stock almost immediately traded up considerably even from that tender offer price. So until, obviously, those recent days, it was very substantially above where it was when we started our plan.

    So we’re evaluating all options. We don’t want to take for ever to get meaningful parts of this done. And we’ll do what’s in our shareholders medium to long-term interest in terms of how we do it and at what price.

    As far as repaying the debt, I mean, there certainly is a share price at which it wouldn’t make sense to buyback more stock and maybe would think about repaying the debt. But we’re a very long way from that price. And so that’s not something that is under consideration at all.”

    “But as I said, we’re still committed and excited. And frankly, given the recent market decline, I’m glad, it’s played out the way it has so far. And I think, we’re in a good position to buyback some shares of what I think is an attractive price.”

    Full conference call transcript here: https://seekingalpha.com/article/4143789-greenhill-and-co-s-ghl-ceo-scott-bok-q4-2017-results-earnings-call-transcript?part=single

  4. dt

    Even-though chairman commented that prices shot up too high after the tender and therefore GHL was not able to finish recapitalization plan, during Q4 company was buying shares in the open market at an average price of $19/share.

    Company still has $219m for buybacks (c. half of the current market cap) and has clearly stated these funds will be used shortly for repurchases instead of debt repayment. It is quite costly to continue keeping that cash on the balance sheet and pay interest on the debt.

    With shares at $16.8, getting long GHL for a short term gain seems like no brainer.

    Any other opinions?

  5. dt

    Similar line of thinking from Laughing Water Capital in their year end letter:

    “Greenhill & Co. Inc. (GHL) – Greenhill is a boutique investment bank that has struggled to keep up with the competition in recent years, leading shares to decline more than 70% from their 2013 high to where we added GHL as a mid-sized position. The company attracted our attention because they attempted to execute a levered recap, whereby they raised $350M in debt in order to repurchase more than 50% of their outstanding stock. Importantly, the CEO and Chairman both concurrently invested $10M personally in the company in support of the transaction, and the CEO volunteered to take a 90% pay cut in exchange for equity.
    However, the transaction did not go through as envisioned, as there were not enough interested sellers. This creates a situation where we now know there are no sellers in the near term, and we know there is a large buyer, which is generally an attractive setup to step in front of.
    To be clear, GHL is in a competitive business and like all of our companies, they face some challenges. However, we take comfort knowing that the two people who know the most about the firm’s future prospects have both voted with their wallets in support of a brighter future. Further, banking is ultimately a people business, and GHL has been aggressively recruiting new Managing Directors, and their strong balance sheet and the levered upside of their equity has already strengthened their recruiting pipeline, which will drive revenue.
    We presented GHL at the recent MOI Global Best Ideas conference, and have a detailed slide deck that demonstrates why we think GHL could more than double in the coming years, and is unlikely to trade below the failed deal price in the near term. I will be sure to share the deck in a future email, after conference participants have had an opportunity to review it.”

    http://laughingwatercapital.com/wp-content/uploads/2014/01/LWC-Year-End-2017-Letter.pdf

    1. dt

      Great news and all as expected. Couple things to note:
      - This tender is much smaller than the previous one.
      - There will be further $180m left for buy backs or another tender.
      - Share price shot up right to the upper limit, suggesting that even this tender might not be fully filled.
      - There is a significant short interest in GHL and a short squeeze is quite likely.

  6. Alex1511

    “The tender offer will not be conditioned upon any minimum value of Shares being tendered or any financing conditions.”

    Given that and that roughly 6mm shares are sold short, $20 looks like good entry point.

  7. dt

    Only 1m shares tendered ($21m out of $100m were filled) so the tender was again under-subscribed. I am surprised by market reaction – who is selling now at $19.35, when 2 days ago they could tender all they wanted at $20.5. What am I missing?

    GHL still has $260m (half of the market cap) allocated for stock buybacks/tenders

    I continue to own GHL in expectation of another tender offer at a higher price or stock purchases in the open market.

  8. RJChicago

    I second your thoughts dt. It is extremely unusual for a tender to be under-subscribed by so much and then for the stock to subsequently fall by so much.

  9. Alex15

    Greenhill & Co., Inc. (NYSE: GHL) reported revenues of $87.5 million, net income of $6.4 million and diluted earnings per share of $0.21 for the quarter ended March 31, 2018.

    Obviously great results.

    Repurchased approximately 1.76 million shares of common stock and common stock
    equivalents during the first quarter at an average price of $19.77 per share

    Remaining authorization under share repurchase plan at March 31, 2018 was $191.1 million.

    Seems likely that they will do an other dutch tender offer and use that cash for buybacks . Great opportunity to add shares, as the business is also improving and they hired a bunch of new people. Any other opinions?

  10. Alex15

    Sorry for the last sentence I meat:

    They will do an other dutch tender offer and certainly not under $20. Or has anybody a different view? Great opportunity to add shares, as the business is also improving and they hired a bunch of new people. But I dont understand why the stock is trading down AM.

  11. FM W

    DT, Is this still active? Any update on coming tender offer plans? Are you still holding this? Thank you.

    1. dt

      Yes, I am still long, but have sold part of the position. GHL still has loads of cash to mean to be returned to shareholders. However, with share prices at these levels it management might be more reluctant to launch buyback or tender.

      1. FM W

        Could you please notice me if you decided to clear your position? Thank you very much.

        1. dt

          Still holding part of the position. I intend to wait for Q2 earnings and see what management says about future capital allocation.

          At the same time I consider that original thesis is this write-up has already worked out with more than 50% return.

  12. Alex15

    The results came in quite strong. I bought a few shares because management stated:

    “As of June 30, 2018, we have repurchased under our recapitalization plan 8,663,930 shares of our common stock at an average price of $20.49 per share for a total cost of $177.6 million and had $107.4 million remaining and authorized under our repurchase program. We intend to continue to implement our repurchase plan through various means, which could include one or more of the following: open market purchases (including pursuant to 10b5-1 plans), tender offers, privately negotiated transactions and/or accelerated share repurchases.”

    1. dt

      So they bought c. $80m of stock in the open market during the quarter (almost 1/3 of the whole program). Seeing how share price behaved since the end of the quarter, I am guessing GHL continued to repurchase aggressively and will soon run out of the buyback gunpowder. Thus another tender seems no longer likely.

      Therefore I intend to close the position as from my point of view this special situation has now played out – 75% return in 9 months.

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