Current Price – $22.7
Exchange Value – $24.36
Upside – 7%
Expiration Date – expected July/August 2018
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.