Churchill Downs (CHDN) – Odd Lot Tender – $1700 upside

Current Price – $248

Tender Price – $230 – $265

Upside – 7% ($1700 for odd-lots if priced at the upper limit)

Expiration Date – 7th of Feb 2018

No proration for odd lot holders

SEC Filling

 

Churchill Downs has finalized sale of Big Fish Games division for $990m and now is returning $500m of proceeds to shareholders through dutch tender offer. Shares will be purchased between $230-$265. A total of 12%-14% of outstanding shares will be repurchased. Shareholders of less than 100 shares will be accepted on priority basis.

 

Upper limit pricing is unlikely

If tender gets priced at the upper limit, this is a very lucrative opportunity for odd lots. However, I do not believe upper limit pricing is likely:

- CHDN is selling at all times high even-though revenue growth stagnated over the last year. Company is already expensive at pro-forma PE>30. The sold division has generated 37% of revenues, so after the sale there will likely be pressure on earnings from negative operating leverage.

- Recent share price increase was likely driven by expectation of the tender offer.  Company announced its intentions to return $500m of sale proceeds to shareholders right after the sale was signed on 30th of Nov, 2017.

- Insiders own 13% of the company and are allowed to participate in the tender. Couple of them (albeit smaller holders) have already indicated their intentions to tender.

- Previous largest owners (Duchossois family) sold c. half of their stake in June 2017 back to the company at $159/share, below market price at the time. If they are allowed to participate, then current tender price should look very attractive to them.

- Other larger owners have built their stakes in CHDN when shares were materially cheaper and some have been reducing their stakes over the recent year.

Keeping the above in mind I would expect the tender to be significantly oversubscribed and therefore being priced at or close to the lower limit. If market prices approach lower limit, this would definitely be an interesting odd lot opportunity. No position currently.

 

 

11 COMMENTS

  1. Michael Berkhahn

    Thanks for the article. I have a few questions, some that are very basic.

    How does a company determine what the single purchase price is for these dutch tender offers?

    If you are an odd lot holder and tender your shares at the upper limit price of $265, but the purchase price that the company determines is less then what the odd lot holder tendered there shares at, will the odd lot holders shares be tendered? If so, at what price, $265 or the purchase price? (I am assuming the purchase price)

    1. Jesse

      They take the lowest price that will allow them to tender the number of shares they’re targeting. So if they’re targeting one share, you bid $265 for your one share, I bid $230 for my one share, they’ll take the $230. https://www.investopedia.com/terms/d/dutchauction.asp

      If you are above the tender price none of your shares will be tendered. That’s the risk with this one.

  2. greg lia

    If you select “no price specified” your shares, odd lot, will be accepted. You’re just rolling the dice on where the tender price settles.

  3. Rick Sanchez

    For those who are inclined towards options, does it make sense to set up an iron condor here? Assuming that we can expect the price to trade in between the range of $230-$265?

    1. Andrew Davis

      Interesting idea! A few comments – I’d want to ensure the option expire prior to expiry of the tender. Your downside is protected if the stock price drops (you can offload shares at minimum tender price – assuming tender doesn’t get cancelled). What would concern me is the potential for losses if the share price suddenly skyrockets e.g. someone announces they’ll acquire the company at a 50% premium. I might be wrong – but I think you’d incur losses in that instance?

      1. Andrew Davis

        By the way, since you’re considering option strategies, one way to view odd-lot tenders is that the Company is essentially giving you a free option to Put 99 shares onto them at the lowest tender price. Sometimes what I’ll do is sell a Put option and collect the premium (I’m selling something that I’ve just been given for free). If the share price drops and the Put option gets exercised, I sell 1 share at market and tender 99 shares as an odd-lot.

        1. Sean McMahon

          Andrew, that’s a strategy I’ve never considered. If I had the resources (mostly time), I’d love to do some backtesting on that vs the traditional buy 99 shares.

  4. Sax Man

    Regarding the potential downside: Do you see any realistic scenario where anyone would tender shares below market prices close to the expiration date of the offer?

    1. Austin Newsom

      If they think the stock price will fall post-tender they might do exactly this.

  5. dt

    Tender results are quite surprising – max tender price ($265) and proration factor of 82.7%.
    I was expecting much higher participation, especially with shares at all time high and limited growth over the last year.

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