Whirlpool (WHR) – Odd Lot Tender Offer – 9% or $1400 upside

Current Price – $156

Tender Price – $150 – $170

Upside – 9% or $1400 (if tender is priced at the upper limit)

Expiration Date – 23rd of May 2018

No proration for odd lot holders

SEC Filling

 

Yet another dutch tender with odd-lot provision for 8%-9% of the company (total tender amount $1bn). Currently WHR trades close to the lower limit.

Few members emailed me this suggesting that this tender has reasonable chances to end up above the current market prices:

  • Shares are trading at two year lows.
  • Ongoing share buybacks – $1bn spent on share repurchases in 2017, and current authorization of $1bn on top of the tender.
  • Shares trade close to unaffected price of $150.
  • On 2017 earnings company trades at 11.5x operating cash flow and 21xFCF. Based on 2018 guidance company is much cheaper, but I am not sure if that guidance has any credibility (see below).

However, there are a number of negative aspects as well which are likely to encourage investor to tender their shares and exit the position (in turn making the tender oversubscribed and potentially priced at the lower limit):

  • Tender offer and business sale announcements coincided with Q1 results, in which management slightly lowered earnings guidance for 2018. So it is hard to judge where the company’s share price would trade in the absence of the tender offer (my guess is below $150/share).
  • Even though cashflow guidance remained unchanged, management has already badly missed the estimates before, so not sure if anyone considers this guidance to be credible. From Q3 2017 earnings (with just 2 months left till end of the year) “Company now expects to generate cash from operating activities of $1.55 to $1.6 billion and free cash flow of approximately $900 million”. Later in Q4 results announcement “Cash provided by operating activities improved $61 million to $1.3 billion, and free cash flow improved $77 million to $707 million”.
  • From cashflow perspective Q1 2018 is worse than Q1 2017 - thus a massive turnaround in operations would be necessary to achieve the stated guidance.
  • In all of the recent earnings releases management quotes industry tailwinds of raw material inflation and unit volume declines unfavorably impacting the results – these tailwinds have not been reversed yet.

CNBC’s Jim Cramer said Dutch Auction, in the next month or so, could help give Whirlpool a short-term boost, marking it a better time for investors to sell.

“I think you should take that opportunity,” the “Mad Money” host said Thursday.

Earlier in the week, the company posted a “subpar” earnings quarter, something the Mad Money host said will be difficult to recover from. Perhaps sensing that the share price is too low, Cramer said, the company started a modified Dutch auction tender offering this week: repurchasing $1 billion worth of stock and is willing to pay anywhere from $150 to $170 per share, depending on where the auction ends up.

But Cramer said that’s not enough.

“Whirlpool’s getting hit by the new steel and aluminum tariffs, which affect nearly everything these guys make,” he said. “I think the stock can go a bit higher here if the president issues a lot of exemptions for the steel tariffs next week, but I would sell Whirlpool into that strength. It’s just not worth the risk, not in this environment.”

No position at the moment

23 COMMENTS

    1. Sean McMahon

      @dt
      Thank you for outlining the risks. My DD appears minimal compared to yours, and I appreciate the insight as I had not weighed any of your counterarguments.

      @William Silver
      That is a great pickup, and a big thank you for sharing, as I was embarrassingly unaware. Buying in yesterday morning, 99 shares at $155, without a guarantee of an odd lot provision, I still felt the risk/reward skewed sharply in my favor. This dividend payment will reduce my risk floor to ($380) while juicing potential returns to $1,370.

      Even with current price above $156, this deal seems like a no-brainier to all but the most risk averse.

      -Sean

  1. greg lia

    WHR got hit bad with the overall market today. One way to play almost risk free is sell a single may 18 150 put in as many accounts as allowed to tender. Premium about $0.90 per. Would be very unusual for stock to trade below minimum Dutch floor prior to Dutch expiration. Very high odds you pocket the $0.90 and put expires worthless. If stock were to breach 150 and 100 shares are put to you, sell a single share and tender the remaining 99 and collect your non prorated cash, minimum 150.

  2. Michael Lax

    I bought 99 shares at 155, and then bought a 155 put, sold a 150 put for $2 per share. So after counting the dividend, my maximum loss is less than $1 per share, maximum gain is about $14 per share.

    1. dt

      Not sure I understand the reasons for ‘bear put spread’ – basically you are betting that on the 18th of May WHR will trade below $153, only then your option pair end’s in max $3 profit.
      And your max loss is larger than $1. Assume that on 18th of May shares trade >$155, then both of your options expire worthless. If tender happens at $150 a week later, then you lost the difference to your purchase price + premium paid on the option pair less dividends.

  3. Michael Lax

    My options expire on May 25th. If WHR trades below $155, I am protected by the put spread. I put in an odd lot tender for $155. So, if WHR tender is less than $155 and shares trade at $150, my loss would be $200 minus dividends.

    1. dt

      If your puts expire after the tender then you would need to tender odd-lot at $150 in order to be guaranteed acceptance. Otherwise your loss would not be capped.

  4. greg lia

    Yes, I assumed Michael would tender at $150 or ‘no price specified”, of course that does not preclude shares being accepted at a much higher price, if that is where the tender settles. I do agree there is technically some risk on the timing if the tender goes out at the low end at 150 and then the shares move up prior to May 25, the trade could lose on both fronts. Not likely, as I, for one, am expecting the price to drop once the date passes and the “right to tender” is no longer attached to the stock.
    I do have a question as to whether the trade is allowable. The bear spread is a short position, while at the same time as tendering shares. An outright short while tendering is a no no, and my assumption is that a synthetic position would be considered the same, however, I can certainly not state this unequically.

  5. Michael Lax

    Where is it stated that you can not short while tendering shares?

  6. Federico Flom

    The stock is acting poorly, any thoughts here ?

    Whirlpool China is just 4.5% of company revenues, not sure the real impact here.

  7. Michael Lax

    Thank you for the link. If I am reading the law correctly, as long as I do not have the obligation to sell ( i.e selling a call option), the fact that I have the option to put the shares would not reduce my net long position and would therefore be legal. Disclosure: I am not an attorney and this is not a formal legal opinion.

  8. M G

    I sold 5/18 put with strike 150 for 1.24 premium. If it expires above the strike I collect the premium. But I still have 4 days before the tender so I can potentially buy after expiration and then tender them to add more juice to the trade. Does it make sense?

    Of course this gets more attractive if we expire near but above the strike.

  9. Michael Lax

    With Whirlpool trading in the mid-range of possible tender prices, I am thinking of exiting the position with a profit rather than waiting for the actual tender. Any thoughts?

  10. Anuj Kumar

    Prelim tender price of 159.50 was much lower than I expected given trading over the last week.

  11. Ben

    I was surprised by how low the auction price settled too. In the previous 5 days before the expiration day the stock closed above (and never went below interday) the auction settled price of 159.50 with cumulatively 3x the volume of the tender (21M shares open market vs. 7M tender). Why did so many folks tender so low when they had a week to sell for more? The last week of open market trading volume including the tender was 30M shares or about 45% of the total shares outstanding. Can anyone offer some insight?

    1. Anuj Kumar

      Do you think too many people are trying to play these tenders now? And are buying shares at the bottom of the range and tendering at no price? I saw HLF just had a similar “poor” result and was very over subscribed.

  12. Chi Man Poon

    Thinking at currrent price may be a good entry point to sell put.

  13. dt

    This transaction resulted in $300 gain (for those who tendered) or $800 gain (for those who sold out before tender expiration) relative to write-up price. However, the stock traded down to $150 (lower tender limit) during the month which resulted in almost risk free opportunity for far larger gains. On top of that strategy of selling options at the lower limit proved to be very lucrative.

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