Current Price – $630
Merger Consideration – $669
Upside – 6%+
Expiration Date – Q3 2018
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.
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 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.
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.