Current Price – $10.2
Merger Consideration – $11.6+
Upside – 14%+
Expiration Date – Aug, 2018
Boardwalk Pipeline is an MLP that is 51% owned by Loews, which also happens to be its GP. At the end of April Loews announced that it is seriously considering exercising its call right to acquire the remaining 49% of BWP units owned by minority holders at a price to be calculated based on formula (average of 180 days of closing prices). However, Loews did not reveal anything with certainty or anything regarding the timing. This caused share price to drop 20% (recovered half way since) as market got scared that Loews will drag out acquisition process till the average price gets more favorable. Other shareholders got vocal as well (here and here).
The bet here is that Loews will try to avoid potential litigation by not dragging out the process and will buyout minority holders before the average prices over the last 180 trading days drop below $11.6+
There are two main uncertainties here:
- Whether Loews will exercise its right and where will BWP trade if it does not;
- Expected timing of the transaction, which will also determine the buyout price.
The first one is a bit of a guesswork. As can be seen from Barron’s article, BWP share price underperformed MLP index this year and Loews might see this as opportunity to acquire BWP cheaply. If Loews had no real intentions to buy out BWP minority unitholders I doubt they would have mentioned anything regarding the call right. If Loews backs off, then it is likely share price would revert to pre-announcement levels of $11.
Timing is the second uncertainty. Limited Partnership Agreement says:
(b) Notwithstanding any other provision of this Agreement, if at any time: (i) the General Partner and its Affiliates hold more than 50% of the total Limited Partner Interests of all classes then Outstanding and (ii) the General Partner receives an Opinion of Counsel that the Partnership’s status as an association not taxable as a corporation and not otherwise subject to an entity-level tax for federal, state or local income tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers by subsidiaries of the Partnership that are regulated interstate natural gas pipelines, then the General Partner shall then have the right, which right it may assign and transfer in whole or in part to the Partnership or any Affiliate of the General Partner, exercisable at its option within 90 days of receipt of such opinion, to purchase all, but not less than all, of all Limited Partner Interests then Outstanding held by Persons other than the General Partner and its Affiliates, at a purchase price for each class of Limited Partner Interests equal to the average of the daily Closing Prices per Limited Partner Interest of such class for the 180 consecutive Trading Days immediately prior to the date three days prior to the date that the notice described in Section 15.1(c) is mailed.
(c) If the General Partner, any Affiliate of the General Partner or the Partnership elects to exercise the right to purchase Limited Partner Interests granted pursuant to Section 15.1(a) or (b), the General Partner shall deliver to the Transfer Agent notice of such election to purchase (the “Notice of Election to Purchase”) and shall cause the Transfer Agent to mail a copy of such Notice of Election to Purchase to the Record Holders of Limited Partner Interests of such class or classes (as of a Record Date selected by the General Partner) at least 10, but not more than 60, days prior to the Purchase Date
“Opinion of Counsel” means a written opinion of counsel (who may be regular counsel to the Partnership or the General Partner or any of its Affiliates) acceptable to the General Partner.
All timing eventually ties to the date on which ‘Opinion of Counsel’ was received. So the expected timing of transaction can be constructed in the following way (with P indicating expected Purchase date:
- P-90 – General Partner received Opinion of Counsel;
- P-14 – The last day for calculation of the purchase price, comprised of average closing prices during previous 180 trading days;
- P-10 – The latest date shareholders need to be notified about the purchase;
- P – Purchase date.
Management has not revealed whether ‘Opinion of Counsel’ has been received or when (it has full discretion on timing). The risk is that Loews delays this part which would extend the acquisition and lower the average price. However, due to this Loews might be accused of price manipulation and expose itself to potential litigation. So an argument could be made that Opinion of Counsel was received at the time or before Loews made public its ‘serious considerations’ to buy out minority holders.
Below are number of scenarios with different dates for Opinion of Counsel (assuming price for the remaining trading days remains at current $10.25).
As can be seen from these calculation even if Loews extends the buyout till the end of the year, the resulting purchase price would remain above current levels. Obviously, this analysis assumes that Loews will proceed with the buyout and that the unit price will remain on average at $10.25.
Currently I am betting that Opinion of Counsel was received before Loews announcement (i.e. before 30/04/18) which would suggest that shareholders will be notified about the buyout over the coming month and units will be acquired at $11.6+, which is 13.5% upside to current prices.
Another way to trade this is through options or spreads – with the increased risk of loosing entire investment with OTM options if the assumptions above do not materialize.
I am long straight equity and also long September call spread.