Tegel Group (TGH.NZ) – Merger Arbitrage – 10% upside

Current Price – NZD1.16

Merger Consideration - NZD1.23 + NZD0.04 in dividends

Upside – 10%

Expiration Date –August 25th, 2018

Takeover Proposal

This idea was shared by Vladimir.

 

Very straightforward situation in my view, so I will be very brief in describing it.

Bounty Fresh Food made an offer to acquire Tegel Group  at NZD1.23 per share (transaction value of c. NZD440m) plus offer also permits TGH to pay a cash dividend that does not exceed in aggregate 4.1 cents per Share without this affecting the Offer price for Shares. Current spread including dividend stands at 10%. Offer expires on 25th of August 2018.

Conditions:

  • Bounty Fresh Food receives acceptance of no less than 50% of TGH shares
  • All consents in regards to Overseas Investment Regulations
  • No leakages, changes in constituent documents or significant revision of the guidance

Bounty Fresh Food already owns 13.5% of Tegel Group. On top of that largest shareholder Clarus Investment owns 45% stake and has entered into a lock up agreement to sell the shares under the offer. Given that together these holdings represent more than 50% ownership the first condition will be satisfied.

From the offer doc:

“Further, Claris Investments Pte. Ltd (the largest shareholder in TGH) has irrevocably agreed to accept the Offer in respect of all the Shares held or controlled by it (representing 45.00% of the voting rights in TGH). Given Bounty Fresh already holds and controls Shares representing 13.49% of the voting rights in TGH, upon Claris Investments Pte. Ltd accepting the Offer, the minimum acceptance condition set out in the Offer will be satisfied.”

It is hard for me to come up with any good explanation why the current spread exists other than it is a micro-cap in New Zealand. I don’t think that the risk of the offer not going through is particularly high in this case.

Company is also listed on Australian Stock Exchange and appears to trade at the same price, just in Australian dollars.

 

Company Background

Tegel Group Holdings Limited (NZSE:TGH) engages in the breeding, hatching, processing, marketing, and distribution of poultry products in New Zealand. The company offers value added main meals, snacks, and convenience meal options; sausages, and processed meat products; and turkey and beef products, as well as fresh and frozen whole chickens, fillets, and portions. It also manufactures and markets a range of other processed meat products. The company markets its products under the Tegel, Rangitikei, and Top Hat brand names. The company also exports its products under the Pure New Zealand Premium Chicken name. Its value added convenience products include fresh value added, cooked, and smoked small goods, as well as frozen further processed products through channels, such as retail grocery, foodservice/industrial, and quick-service restaurants.

TGH has historically profitable growing business, which currently trades at c.8.0x EV/EBITDA and 13.2x P/E. Company also pays dividends, so at least at the first glance looks like a solid business.

Bounty Fresh Food, Inc. owns and operates a commercial broiler hatchery. The company is based in Caloocan City, the Philippines.

25 COMMENTS

  1. dt

    Interesting case. Agree that it is hard to see any reasons for the spread to exist. Liquidity is quite high on New Zealand exchange so it does not seem to be an obscure micro cap – at least local investors should definitely have a good grasp on this case. So what’s missing? Can second condition (reg approval) be an obstacle?

    A bit strange that approval is required from 50% of overall votes and not from votes excluding affiliated shareholders, but maybe that is New Zealand’s peculiarity.

    Regarding dividend – any ideas when this will be announced and what happens if one tenders before dividend announcement?

    Also will the company continue to be listed after tender expiration:
    “Whilst Bounty Fresh is seeking to acquire 100% of TGH’s equity securities, if this is not achieved Bounty Fresh would welcome any TGH shareholder that wishes to remain invested alongside Bounty Fresh in TGH’s future.”

    1. over2u

      The terms of the Offer permit Tegel to pay a dividend of 4.1 cents per Share, which the Board declared on 8 June 2018 in respect of the financial year ending 29 April 2018.

  2. Thinley w

    Has the BOD provided a position in relation to the takeover notice?
    Any regulatory concerns given that the buyer is a Filipino company?

  3. work 22

    Monday June 11th TGH NZ will report results. One condition is that TGH NZ not miss various EBITDA numbers or 2019 guidance by more than 10%. I have no edge on whether or not they do that, we’ll find out in days.

    Also the Board’s independent committee has not yet responded to the offer, waiting on the numbers and independent evaluation of the company’s business.

    NZ government approval also required (seems likely).
    The Bounty Fresh due diligence and filing of the takeover offer did take quite a while (offer originally announced late April).

    While I like this idea, there are a number of conditions and reasons for the wide spread still.

  4. Thinley w

    Has the company had a material adverse change?

    “Last month, Tegel downgraded its 2018 earnings outlook citing slower progress in Australia, one-off costs ranging from compliance rule changes to restructuring and weather disruptions to its New Plymouth processing plant, BusinessDesk reported.

    The company had failed to meet the earnings forecasts in its offer documents as a glut of domestic chicken constrained prices, which has seen the share price decline during the past year.”

    https://www.odt.co.nz/business/tegel-receives-takeover-offer

  5. over2u

    Regarding BoD response:

    According to Tegel, “while the sub-committee of the board is considering Tegel’s position in relation to the takeover notice, it does not consider it appropriate to comment on the merits of the proposed offer.” It continues to advise shareholders to take professional advice before acting with respect to their Tegel shares. Tegel said the target company statement is expected to be sent to all shareholders on June 11 and will provide information on the merits of the offer, including KordaMentha’s independent advisor report.

    Current guidance by the Company:

    Underlying earnings before interest, tax, depreciation and amortisation, excluding one-time costs, is expected to be in a range of $70 million to $72 million in the 2018 financial year from $72 million in 2017. Net profit would be in a range of $25 million to $27 million, down from $31.7 million last year.

    One of the takeover’s conditions is that Tegel cannot issue any guidance or warning that the ebitda or net profit will be more than 10 percent lower than its guidance.

    1. dt

      There is also second part of the condition:

      ” or (ii) TGH not making any announcement or issuing any earnings guidance or warning to the effect that EBITDA or Underlying EBITDA of the Group for the 26 week period ending on or about 28 October 2018 will or may reasonably be less, by 10% or more, than EBITDA or Underlying EBITDA of the Group for the corresponding 26 week period ended 29 October 2017″

      This is strangely worded. Can TGH simply comply with this rule without issuing any guidance at all? Last year company did not provide any guidance with announcement of annual results. FY18 outlook was shared with investors only during AGM in September (http://investors.tegel.co.nz/media/1094/tgh-2017-annual-shareholder-meeting-presentation_nzx_asx.pdf).

  6. Korak

    Can we buy this through IB? I put TGH ticker symbol and all it shows is Textainer Group in NYSE.
    Kindly advise.

  7. Aidan

    Any updates here on the likelihood of the merger to proceed? TGH still at 1.13 on NZ market, so a 10c spread remaining.

  8. M

    My quick take on this is that the biggest risk overseas investment approval remains which would be driving the spread. Furthermore, those of you buying the Australian listed shares should look closely at the additional costs. The offer is strictly in NZ dollars so any distribution to Australian shares would likely incur FX fees, bank fees, and potentially other costs. Please note this is my prediction and not fact based on there being nothing in the documents about payment in A$ to Australian exchange-listed stocks. @dt any thoughts on the impact of fees to non-NZ exchange holders?

    I do not own shares and the risk/reward proposition is not attractive enough to me due to remaining risks, need to hedge NZD/AUD in the interim and the likely erosion of part of the spread upside from expected fees as I don’t have a New Zealand account. If I was from New Zealand and had a New Zealand brokerage account then potentially I’d be more interested especially once the overseas investment approval becomes clearer.

    1. dt

      At least on IB there should not be any incremental FX costs. I remember seeing a note along the lines that any merger distribution will be in AUD equivalent to NZD1.23.

      1. M

        Assuming that the deal goes through, payments of NZ $1.23 will be made to all shareholders (both Australian listed and New Zealand listed). The shareholders can do their own currency conversion if appropriate with the funds they receive. Hope that clarifies what the documents could have spelt out clearer.

  9. M

    I would have thought that the bidder would pay in NZD so for simplicity say the bidder pays $100NZD. Assume 80% NZ listed shares and 20% Aus listed shares.

    -$80NZD to NZ listed shares
    -$20NZD converted to AUD (costs of FX, bank and other fees subtracted) so in reality, less than $20NZD will end up in AUD after costs then this will be transferred to Aus listed shares. That’s my guess…

    Ideally, they would just pay everyone in NZD and buys could do the FX conversion themselves at the time of buying on Aus exchanges….

    Either way the massive overseas approval hurdle is still lingering and driving the spread opportunity.

  10. Michael Bumstead

    @M why do you think overseas investment approval is a big hurdle? The same company received it a few years ago when they sold to their current owner, who took them private. (And then pubic, and is now selling)

    Is there a reason you think that is more of a hurdle now (different buyer, change in NZ, etc?)

    1. M

      I view it as the biggest risk to the deal falling over and the reason buyers are rewarded with the current spread. Whether or not it is equal, less or more of a hurdle between today’s deal and previous Tegel transactions is subjective. My opinion and it is only that is simply the current spread is not enough for me to get excited about given the downside risk if overseas investment approval is not received.

      For what it’s worth (not a lot) I believe stranger things have happened and the political environment globally has moved towards nationalism in recent years. This is merely my view. In summary, I’d prefer to not risk a potential 30% downside for a potential 10% upside (less after tax) whereby overseas investment approval could go against my investment. Others risk tolerances or views may differ.

  11. dt

    Comments from the board on transaction – overseas investment approval remains outstanding and needs to be received within a few weeks, otherwise the merger will be cancelled.

    “A key condition of the Offer which remains outstanding is approval under the Overseas Investment Act. Without commenting on the application itself, the Independent Directors remain hopeful that a decision can be made (by Ministers, on advice from the Overseas Investment Office) within the Offer period which runs until 25 August 2018 (the “Offer Period”). This Offer Period, as governed by the Takeovers Code, cannot be extended. Any Tegel shareholder intending to accept the $1.23 per share Offer by Bounty therefore has until 5:00pm (NZT) on 25 August to 2018 for their acceptance documentation to be received by the share registry.

    Whilst Tegel shareholders cannot accept the Offer beyond the Offer Period, Bounty will have a further 30 days to satisfy all conditions of its Offer, including approval under the Overseas Investment Act, should extra time be required. If Bounty is unable to meet the 30 day deadline to declare its Offer unconditional then the Offer will lapse and all shareholders who have accepted the Offer will retain their respective holdings.”

    http://investors.tegel.co.nz/media/1129/180810-shareholder-update-final-nzx-asx.pdf

  12. Pavel V

    Emailed OIO and got this answer :

    “The application for consent under the Overseas Investment Act 2005 for Bounty Holdings New Zealand Limited to acquire up to 100% of the shares in Tegel Group Holdings Limited is currently being assessed. We are unable to provide an indication when a decision will be made.”

      1. Fa

        Do you have by any chance a maximum ETA for this application? Could it be 1 extra month, 6 month, 1 year???

        Thanks

  13. dt

    Following OIO approval the spread has now fully closed. 10% return (including dividends) in 3.5 months.

  14. Michael Bumstead

    Has anyone gotten paid on this? I read the press release, which seems to indicate that those who haven’t tendered will get paid within 7 days of Oct 22. However, I thought if we had tendered (which I did through IB) it would be sooner. Maybe not?

    1. over2u

      I have tendered through IB, but didn’t get paid either. Stock ticker has now extension VALUE.

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