Pershing Square (PSH.AMS) – Tender Offer – 8% upside

Current Price – $12.8

Tender Price - TBD

Upside – 8% – 23%

Expiration Date – May 2018

This idea was shared by Alex.

 

Pershing Square Holdings intends to launch $300m Tender Offer for own shares. This is approximately 10% of market cap. Pricing has not been announced yet, but precedent of previous tender suggests it is likely to be at 16%-10% discount to NAV vs 23% discount currently. This tender is part of Ackman’s strategy to reduce the gap between NAV and the share price.

Tender will be launched only after shareholder meeting, which is scheduled for 24th of April, 2018. Tender details might be announced earlier.

There is a potential trade on the expectation of bounce upon announcement of tender details as well as longer term investment by betting that Ackman will be able to eliminate discount to NAV, in which case PSH shares should significantly outperform the market.

 

Background

PSH currently trades at historically largest (22%-25%) discount to NAV (see slide 53), which is likely a result of investors fleeing the fund after PSH has under-performed the market in recent years by a wide margin:

PSH performance

It is unlikely the discount will widen further, especially with ongoing buyback and upcoming tender offer. Investors who were dissapointed with recent performance had sufficient liquidity to exit the positions over the last two years. Fund returns should also eventually mean revert.

Ongoing organizational changes (slides 17-20), reduced management fee as well as management’s efforts to close the gap between NAV and share price are expected to improve company’s image in the eyes of investors.

Also until fund’s performance crosses its high-water mark (NAV of $26.37) management will not be able to collect any performance fees. So Ackman is very incentivised to continue purchasing stock below book value.

I think that given the decreasing amount of AUM and the under-performance pressure is high on Ackman to „deliver some value”.

 

Previous Tender & Expected Pricing

On 3rd of January, managerial team (through PSCM Acquisition) has announced $300m potential tender offer. Pricing was set at 16%-24% discount to NAV (vs 23% share price discount at the time). Share price jumped by 4% upon the announcement.

Couple weeks later the offer was improved to 10%-16% discount to NAV, which resulted in another 4% bump in the share price and NAV gap was reduced to 17%. Later the discount widened again so the announcement effect was quite short-lived.

Eventually, due to regulatory and tax implication concerns the tender by the management team was eventually withdrawn and replaced by the expected self tender of PSH.

There was speculation that Ackman & friends might still pursue spending the intended $300m of their own money on top of the PSH tender (making the total $600m or 20% of the company), but I am not sure how well founded these are.

In any case, I think previous tender serves as guideline on the pricing – the range should not be lower that 10%-16% discount to NAV. This would offer 7% return if shares of PSH trade up to the lower tender limit upon announcement.

 

Ongoing Share Buyback

In AGM 2017 shareholders approved buyback program for up to 5% of PSH’s outstanding public shares. Since then 5.5m shares have been repurchased for $77m (at average discount to NAV of 20%). Buyback program still has remaining capacity to repurchases an additional 6.5m of shares.

Buyback program was suspended due to the announced management’s tender offer. The company will seek shareholder approval to renew the programmer at the AGM.

Tender offer coupled with ongoing buyback should provide floor for discount not to widen any further.

 

Main Risk

  • Exposure to NAV fluctuations might eliminate any upside from closing of the discount;
  • Tender will not be launched till after AGM which is scheduled for end of April;
  • Tender offer is still subject to shareholder approval (likely to be received);
  • Tender Offer might result in high proration and only part of the shares tendered will be accepted.

6 COMMENTS

    1. Alex15

      Most likely not. Part of the delay and the arguments with the Dutch regulator were about this topic. My understanding is that US shareholders won’t be eligible for the tender.
      Some additional thoughts:
      • Ackman&friends seems quite likely to go ahead with open market purchases after AGM.
      • The discount widened again despite attractive tender prices due to weak performance in feb, tax selling and uncertainty about tender details.

  1. over2u

    Shareholders may tender all or any part of their holding of Public Shares for acquisition by the Company at the strike price (“Strike Price”).  The Strike Price will be determined on the basis of valid tenders made by shareholders at a price between a 15% ‐ 25% discount to the Net Asset Value per Public Share (the “Reference NAV”) as of 9 May 2018 (the “Reference NAV Determination Date”).  
    The Company will publish a daily net asset value throughout the duration of the Tender Offer, up to 9 May 2018.

  2. Alex15

    The upside will more likely come from the additional shares purchases of ackman&affilates. Because this tender will be heavily oversuscribed and close at the lower end. AGM approved the additional buyback and the company has $700mm (this doesn’t include the $300mm purchases of Ackman) to pursue investments or additional buybacks. Also there is NAV accreation if PSH buys back at a discount to NAV. The setup is very attractive. I am really interested in hearing opinions on this. Does the portfolio really derserve a 22% discount?
    A good write up: https://www.barrons.com/articles/how-to-buy-bill-ackman-dan-loeb-on-the-cheap-1458970084

  3. Alex15

    Discount stands at ~23%. Will be interesting to see the final price. NAV accretion would be around 2,5% if all shares were bought back at those levels. With such a high discount I can’t imagine the company or Ackman himself won’t peruse additional purchases. Also positive for the stock is that the number of sellers will certainly be smaller after the tender.

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