Central Steel & Wire (CSTW) – Merger Arbitrage – 6% Upside

Current Price – $630

Merger Consideration – $669

Upside – 6%+

Expiration Date – Q3 2018

Merger Announcement and Merger Agreement

This idea was shared by Neo.

 

This is an illiquid micro cap merger arbitrage where final payout depends on the eventual balance sheet composition at the time of closing as well as transaction expenses. Estimates based on 30th April balance sheet suggest $669/share merger consideration. Transaction is not subject to financing and deal has been approved by BoD of both sides as well as by Central Steel shareholders.

 

Background

Central Steel and Wire is primarily engaged in the distribution of ferrous and nonferrous metals. The metals are generally obtained from rolling mills in many forms and distributed from the Company’s warehouses, which are primarily located and serving customers in the Midwest. The buyer, Ryerson (RYI), is a leading value-added processor and distributor of industrial metals, with operations in the United States, Canada, Mexico, and China. The synergies of merging these two businesses are quite evident on both revenue and cost sides.

 

Acquisition Consideration

Acquisition consideration will be calculated as $140m plus net cash plus excess working capital and less estimated transaction expenses:

The transaction values Central Steel & Wire at an enterprise value of $140,000,000 on a cashfree, debt-free basis with a normalized level of working capital. For informational purposes only, if the proposed merger would have been effective as of April 30, 2018, the total proceeds available for distribution to Central Steel & Wire shareholders would have increased (i) by approximately $10,675,000 as a result of net cash in the business, which includes estimated transaction expenses, and (ii) by approximately $13,000,000 based upon net working capital exceeding the target working capital amount, resulting in closing per share merger consideration of approximately $669 per Central Steel & Wire share.

CSTW is dark company so reporting is sporadic. Annual report indicates that company was cash burning over the last two years. However, latest quarterly earnings release suggests business continues to improve significantly:

“Net sales for the first quarter of 2018 were $172.4 million, an increase of 17.6% from $146.6 million in the first quarter of 2017 and up 15.7% from $149.0 million in the fourth quarter of 2017.”

“First quarter EBITDA excluding LIFO was $4.2 million, an increase of $2.1 million over the first quarter of 2017 and $8.5 million compared to the fourth quarter.”

“The improved demand environment that started in mid-year 2017 continued in the first quarter” said Steve Fuhrman, Chief Executive Officer. “Current indications suggest that the market will continue to be supportive in terms of end customer demand. Deregulation, steel duties, steel and aluminum tariffs, and the high levels of mill capacity utilization continue to support pricing and a positive market outlook. With this foundation and the potential additional benefits to the industry that could come from sources such as meaningful infrastructure spending, we are optimistic about what lies ahead in the form of improved cash flows and shareholder return.”

This suggests that cashflow is expected to improve before the deal closes and eventual per share consideration might be higher than the $669 (there should not be any material seasonality in metal product distribution business).

CSTW is expected to release second quarter earnings update in mid July (judging by the timing of Q1 release) which might shed some further light on the direction of the business as well as merger consideration.

 

Risks

The risk of deal being cancelled outright is low as transaction seems to make business sense and is supported by BoDs and shareholders. Beside customary closing conditions the only other potential hurdle is financing by Ryerson. Company is already quite levered at 6.5x EBITDA and this transaction would increase the leverage further. Although Ryerson stated that the company has ample liquidity to close this deal, Moody’s issued a warning re increased credit risk.

Nevertheless the highest risk is the uncertainty regarding eventual merger consideration which likely accounts for the largest portion of the spread.

The closing price prior to the announcement was $455 (40% downside), however the stock is thinly traded, so if deal falls through, it might be tough to get out. 

14 COMMENTS

  1. Thinley w

    Do you know if the company can use its line of credit to finance the transaction?

  2. work 22

    thanks for idea and details. probably so illiquid most people turned away. i did buy some, but of course, hard to buy a lot!

    1. dt

      So CSTW is supposed to be trading ex dividend already (26th was the record day).
      This is a special dividend, but amount is less than 25% so seems like standard ex-dividend rules should apply.
      What am I missing?

      1. mcg mcg

        Its otc, so no rules apply :)
        exchange will not quote it “ex”

  3. Michael

    I confirmed with CEO that the $50 spec. div. is part of the $669 merger consideration. So yeah, weird that it has not dropped more.

  4. Neo

    Can confirm the special div reached my account. Seems like buyers of the stock haven’t priced it in yet.

    1. Austin

      So they paid a $50 per share dividend, and the stock only dropped by about $20 ($625 to $606)? Odd situation.

  5. Terence

    Does anyone know when the ex-dividend date is? Neo, did the special div hit your account after market close June 29? If so, I wonder if ex date is today.

    I did not buy CSTW. Just curious for info purposes.

    1. Neo

      “Does anyone know when the ex-dividend date is?”
      Not sure when is ex-div, but I don’t think it is later than the Jun 26 record date.

      “Neo, did the special div hit your account after market close June 29?”
      Yea.

  6. Neo

    Deal closed.

    On July 2, 2018, Joseph T. Ryerson & Son, Inc. (“JTR”), a Delaware corporation and wholly owned subsidiary of Ryerson Holding Corporation (“Ryerson”), completed the acquisition of Central Steel and Wire Company, a Delaware corporation (“Central Steel”), pursuant to the terms of the previously disclosed Agreement and Plan of Merger (the “Merger Agreement”), dated as of June 4, 2018, by and among JTR, Hunter MergerCo, Inc., a Delaware corporation and wholly-owned subsidiary of JTR (“Merger Sub”), Central Steel, and Fortis Advisors LLC, a Delaware limited liability company, solely in its capacity as the representative of Central Steel’s stockholders thereunder. Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into Central Steel (the “Merger”), with Central Steel surviving the Merger and continuing as a wholly-owned subsidiary of JTR.

    Central Steel is a leading metal service center with locations across the Central and Eastern United States. Central Steel employs approximately 900 people and operates out of six locations offering custom solutions utilizing value-added processing and a full line of metal products.

    The holders of common stock, par value $5.00 per share (the “Common Stock”), of Central Steel as of the closing of the Merger will receive aggregate Merger consideration of approximately $150.8 million, or approximately $616.32 per share, in cash from Ryerson in connection with the closing of the Merger. In addition, shareholders of Central Steel as of the closing of the Merger may receive up to $7.5 million in the aggregate of additional consideration, which is representative of the amount held back in the transaction pending the final determination of Central Steel’s actual net working capital and net cash (after deducting transaction expenses) to confirm that the closing payment amount was not overstated. Further, if actual net working capital and net cash (after deducting transaction expenses) exceeds the estimated amounts used to calculate the closing payment, such shareholders will receive additional consideration for the amount above such estimates. An additional $1 million has been held back to cover the expenses of the shareholders’ representative pursuant to the Merger Agreement, the balance of which, to the extent not used, will also be distributed to Central Steel’s shareholders as of the closing of the Merger on a pro rata basis.

    JTR will also assume approximately $8.9 million in transaction related obligations of Central Steel as a result of the closing of the Merger, including certain transaction expenses and retention and change in control payments.

    In connection with the anticipated closing of the Merger and as contemplated by the Merger Agreement, Central Steel declared a special dividend in the amount of $50 on each share of its Common Stock, which was paid on June 29, 2018.

    1. dt

      This worked out nicely. $50/share in dividends + $616/share merger consideration +$30 in potential further distributions.

      So in total between 5.7% and 10.5% return in 3 weeks.

      Congrats on good trade!

Leave a Reply

Your email address will not be published. Required fields are marked *