CVR Refining (CVRR) – Exchange Offer – 7% Upside

Current Price – $22.7

Exchange Value – $24.36

Upside – 7%

Expiration Date – expected July/August 2018

Exchange details

 

CVR Energy (CVI) is the general partner of CVR Refining (CVRR) and together with affiliates owns 69.8% of CVRR units. CVI itself is 82% owned by Carl Icahn.

CVI is offering to exchange almost all of the remaining free-floating units of CVRR into CVI shares at the exchange ratio of 0.6335. At current prices such exchange represents 7% spread.

The aim of the exchange is for CVI and affiliated entities to get to 95% ownership of CVRR, with minimum condition set at 80% - this would allow CVI to exercise its call right and buyout the remaining listed units (second write-up today about this). It was also stated that at the moment CVI has no intentions to exercise such call right.

Exchange offer is subject to:

  • Approval of CVI shareholders, which is kind of given due to 82% ownership by Carl Icahn. Shareholder meeting seems to be scheduled for some time in June, after which the tender offer should officially start;
  • Minimum condition (80% ownership reached) – this would require more than 15m of shares, or 33% of remaining freefloat, to participate in the tender;
  • Other customary conditions.

So it seems that the only real obstacle is sufficient tender participation. Some CVRR shareholders might be reluctant to switch to lower yielding CVI (MLP investors tend to be yield driven), which is likely the reason why on the date of the exchange announcement CVI also increased dividends by 50%. Now current yields of both entities approximately match (CVRR distributions are not fixed and depend on cashflows, so there might still be large discrepancies going forward). Additionally, some insiders (not included in the 69.8%) also indicated their intentions to participate in the exchange, although amounts were not revealed.

Given the considerations above and taking into account that Carl Icahn is standing behind the wheel of this exchange transaction, I am guessing that minimum condition will be met.

Another potential reason for the spread to exists is 3.5% borrow on CVI and limited availability of shortable shares (at least on IB) – I am kind of cutting the branch I am sitting on by posting this. Nevertheless, assuming this transaction closes in couple of months, borrow fees would need to be pushed up substantially to eliminate the pay-off from this arbitrage.

Interested in hearing other opinions on what I might be missing here. Both CVI and CVRR are $3bn market cap entities and thus such a large spread is unlikely to exist for a seemingly riskless transaction.

20 COMMENTS

    1. dt

      Meeting is in June – at least the month is indicated in the proxy. And then I assume tender will be for another month or two.

  1. makarid makarid

    dt, thank you for these last 2 ideas that you posting.2 buyouts after the taxation changes.Very interesting!

  2. Rick Sanchez

    dt, would you suggest to hedge CVI via options? write some calls perhaps

    1. FM W

      Maybe the problem for options is that we don’t know the closing date of the case?

      1. dt

        With timing now known (27th of July), hedging might work using September puts, just option premium would erode a part of return.

  3. work 22

    Sometimes in share for share deals, you don’t receive your stock allocation until days or weeks after the tender offer expires. CVI pays out a 75 cent dividend on 8/3/18, after the tender expires July 27th. If you hedge by being short CVI you will probably owe the dividend, thus reducing the overall return. I say probably, not for sure on closing dates for this etc.

    1. dt

      Good point. I am not sure how exactly this should be treated in all cases, but my guess is that dividend would be paid also on the to-be-received shares. Or otherwise it would be explicitly stated in the docs.

      In this particular case I think there is sufficient time between tender expiration and dividend record date (full working week), so it should not be an issue:

      “On May 28, 2018, the board of directors of CVR Energy declared a second quarter 2018 cash dividend of 75 cents per share. The dividend, as declared by the board of directors of CVR Energy, will be paid on August 13, 2018, to stockholders of record on August 6, 2018.”

      1. work 22

        usually the target shareholders don’t get the first post close dividend. My guess is you won’t receive CVI stock till after August 6th, just based on how most previous deals have been. You might, i don’t know for sure.

        1. dt

          Existing CVRR shareholders that participate in the tender should receive either CVI or CVRR dividend. One of these will definitely be paid out.
          I asked IR to clarify.

          1. Eli

            Is that what IR confirmed or are you still awaiting clarification?

          2. work 22

            thanks. If CVRR holders do get a dividend, either through CVI post close or CVRR pre-close, it would most likely be explicitly stated in the documents. Why? Because its a big bonus to shareholders and incentive for them to tender. Receiving the dividend would be part of the “sales pitch” if you will. Hopefully it does get paid

  4. dt

    Remaining spread stands at 1.5%, tender expires tomorrow. So far hedged and unhedged trades work out similarly (gain of 5%-6%)

    I have not received any clarification on dividends during the time stocks are in transit, but IMHO either CVRR or CVI dividend will be paid out on the tendered shares.

    1. dt

      Finally got response from IR:
      “The intent is to have the exchange completed by August 2nd, before the ex-dividend date of August 3rd. “

    1. dt

      Depends on your broker. If i recall correctly, for IB deadline for tendering shares is 13:00h today.

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