MVC Capital (MVC) – Expected Tender Offer – 5%+ upside

Current Price – $10.51

Expected Payout – TBD

Upside – TBD (likely around 5%+)

Expiration Date – TBD

The BoD of MVC Capital approved tender offer to repurchase $25m of stock (approximately 11% of outstanding). Tender is expected to commence in November and the repurchase price has not been set yet. On top of that on the 31st of October shareholders will vote whether to adopt activist proposal to increase the return of cash to shareholders. If approved this will likely give a further boost to the share price. My trade here is to buy the stock and wait firstly for the shareholder voting results and then for the tender details (with expectation of higher pricing than the current market price).

Company carried out a similar tender back in July and it can serve as an example of expected pricing and shareholder behavior.

Press release

 

Previous Tender Offer (August 2017)

In July 2017 MVC launched Dutch tender to repurchase $15m of stock between $10-$11/share. This amounted to 6.6%-6.0% of outstanding shares. No odd-lot provisions.

The purpose of the offer was to close the gap between share price and NAV (it is a BDC company most of which trade at discount to NAV). Company had plenty of available cash ($120m) following the successful sale of one of its investments on the 1st of June 2017.

Before the tender announcement MVC shares were trading at $10 and shot up by 4% after the announcement.

The tender offer ended up being priced at $10.4 with proration factor of 40%.

 

Proxy fight

Metage Capital has launched a proxy fight for the upcoming annual meeting (scheduled for 31st of Oct). Their proposal is that the company stops putting cash into new investments and concentrates on returning cash to shareholders as long as discount to NAV remains above 10%. Company has plenty of cash to close this gap instantly through open market purchases. So if this plan is adopted, market reaction should be quite positive.

Institutional shareholder services also recommends that shareholders vote in favor of the activist proposal – index funds usually follow recommendations of ISS. Metage also argues that the assessments of other two independent proxy advisory firms were biased.

 

Consideration on tender offer pricing

Tender offer pricing will mostly likely be driven by the voting results on the activist proposal. In any case I would not expect the tender to be priced below the previous one (i.e. $10-$11/share) and the eventual outcome is also unlikely to be below the previous one (i.e. $10.4/share). So even if there is no share price pop upon the voting results and tender offer detail announcements, the downside risk seems to be quite limited.

Current tender will be 67% larger than the previous one and also 40% of share holders that were willing to exit the position at $10.4 have already been redeemed. So assuming shareholder sentiment towards the company has not become more negative, an argument could be made that higher pricing will be required to fill the current tender offer.

Latest NAV (end of July 2017) stands at $13.38. Taking into account July’s tender offer, adjusted NAV should be around $13.58, suggesting that the stock is currently trading at 29% discount to NAV.

 

Other Notes

• Philip Goldstein from Bulldog Investments is on the MVC board of directors and owns 4% of the company (the stake has declined since 2016). He is quite a figure when it comes to special situation investments so his participation is obviously a positive. However, he has this seat since 2012 and share price performance has not been great over this period.