Greenhill & Co (GHL) – Odd Lot Tender Offer – 1.5% upside (12% realized)

Current Price – $17.02

Offer Price – $17.25

Upside – 1.5% or $25 for odd lot holders

Expiration Date – 25th of October, 2017

GHL has launched tender for 40% of the outstanding stock. This is an opportunity to participate in the tender  that is very likely to be under-subscribed and price might shot up if that turns out to be the case. More risk averse investors can pocket $25 risk free.

SEC Filling and amendment

This tender represents two potential trades:

1. Tiny (but close to risk-free) opportunity to gain $20 by buying and tendering the odd-lot amount. Risk of tender getting cancelled is very low and financing has already been arranged.
2. Buy and tender larger amount (i.e. >99 shares) as the pro-ration factor is expected to be low – potentially all tendered shares might be accepted.

The first one is straightforward and there is no need to elaborate more on it. The second one deserves more explanation (below). I am in this one for the odd-lot part only.

 

Background

Greenhill is a M&A boutique, which is borrowing $350m in order to buyback $285m in shares and to refinance existing debt. The main idea of idea is that debt with pre-tax interest payments will be cheaper form of financing than equity with 10% dividends. However, this adds quite  a bit of leverage to an already levered company and could easily backfire if M&A pipeline does not pick-up. For more background on GHL’s recent financial performance I recommend browsing through this article as all as Friendly Bear’s comments in this interview. Overall the market seems to be quite negative with regards to GHL, which is evident from the share price performance as well as large dividend yield (general opinion is that dividends will eventually be cut).

 

Low (or even zero) proration

So why do I expect low proration of tendered shares for the company that seems to be struggling? There are actually a number of factors that suggest this:

1. The tender offer is for 40% of the outstanding shares (increased from 30%).
2. Management and key employees will not participate in the tender – they own 12% of shares.
3. Even with post-announcement price jump GHL shares are trading at all-time low levels, which will discourage some shareholders from participating in anticipation of better times ahead.
4. CEO and chairman both indicated that they will invest additional $10m each by buying newly issued company stock at the same price as the tender offer.
5. CEO agreed to forgo 90% of his salary for five years in exchange for RSU’s that will vest in 5 years.
6. Company will have another $50m available under buyback authorization and could pursue open market purchases (though most likely these will be used to eliminate dilution from vesting RSUs)

Thus we have a situation were Chairman and CEO are signalling firm belief in the future of the company and are even betting additional money on it. Couple that with all time low share price and 10% dividend (which will be more secure for the remaining shareholders) and it is very likely that large portion of shareholders will side with management. On top of that add a certain portion of shareholders that are generally inactive when it comes to corporate actions and by default do not tender (not sure what will be the behavior of index funds in this case). Excluding shares owned by management, almost 50% of shares need to tender for the offer to be oversubscribed. I think this mark will be very hard to reach and all of the tendered shares will be accepted.

I would not be surprised if the tender ends up under-subscribed and share price shoots up post tender.

If the offer ends up over-subscribed then the shares not accepted in the tender might drop back to the pre-announcement levels which will more than eliminate any gains from the shares accepted in the tender. However, due to reasons outlined above I think that post tender price will be closer to the current levels rather than pre-announcement levels of $14/share.