Current Price – €173.4
Price of Tendered Shares – €189.9
Upside – 9.5%
Expiration Date – 24th Oct 2018
This is a slightly different arbitrage situation involving two different shares of Linde traded on the market – the tendered ones (LINU.DE) and non-tendered ones (LIN.DE). I have seen too little of German M&A’s to have confident say on this, but it seems appealing and I would love to here other more educated opinions.
Linde and Praxair are trying to merge (for couple years already) aiming to create the largest industrial gas supplier. Shareholders of both companies have approved the deal already. Several regulatory approvals across the globe have also been received, while the others are still pending. The biggest concern now is demand from US antitrust to divest more than $4.3bn in assets, which is right at the limit of €3.7bn indicated in the merger agreement, beyond which either party is free to abandon the deal. Eventual divestment requirements are expected to be even higher than this. However, discussions with regulators and between the parties are still ongoing, so the deal is still alive.
I have no idea whether this merger will close or not. This is large cap transaction and I am guessing that Linde-Praxair spread (currently at 9%) correctly reflects the risks involved. Due to German law the companies are under time pressure to close this before 24th of Oct (not sure if the date can be extended). Further details and concerns are well summarized here and here.
The trade I am contemplating is not the straight Linde-Praxair arbitrage, but rather arbitrage between the two types of Linde shares. There is LINU.DE, which trades at €189 and represents shares that participated in the tender (92% of all) to be exchanged effectively into 1.54 of Praxair shares. And on the other side we have LIN.DE which is the remaining 8% of shares that did not participate in the tender and which trade at €173. Management indicated that in case the merger closes LIN.DE shareholders will receive cash compensation without specifying the amount:
To that end, Linde Intermediate Holding AG will enter into negotiations with Linde AG regarding a merger agreement. The merger agreement will contain a reference to the merger related squeeze out of the remaining minority shareholders of Linde AG against adequate cash compensation pursuant to sections 62(5) sent. 1 UmwG in conjunction with sections 327a et seqq. AktG. The merger agreement will be provided to the Linde AG Supervisory Board for approval; it would only become effective in the event of a successful completion of the business combination. An extraordinary shareholders’ meeting which would resolve the transfer of the shares of the remaining shareholders of Linde AG to Linde Intermediate Holding AG against adequate cash compensation would take place following the completion of the business combination.
My big questions are:
- Whether the ‘adequate’ compensation can be lower than what the tendering shareholders have received?
- When will this cash compensation be determined?
- What will this cash compensation be based on? (as tendering shareholders will receive shares in new company instead of cash)
- Can Linde decide not to squeeze out the minority shareholders after it publicly announced it will?
The following explanation on how German squeeze outs work does not clarify things much, but suggests that adequate compensation should be at least equivalent to the offer paid to the other shareholders, but the pay-out might take longer to receive:
The amount of the proposed cash compensation is subject to review by a court-appointed auditor and, in the event of a dispute, by the relevant court. Dissenting shareholders may take legal action against the squeeze-out resolution and delay the date on which the squeeze-out becomes effective by five to six months until a court has cleared the squeeze-out in an accelerated proceeding (Freigabeverfahren). Disputes over the amount of the compensation to be paid are to be dealt with in a separate appraisal procedure, which may easily take years (but does not delay effectiveness of the squeeze-out).
Under the Takeover Act, the bidder can, within three months of the end of the acceptance period, apply for a court decision transferring the remaining shares in the target to the bidder if it holds at least 95 per cent of the share capital. Minority shareholders are entitled to the same compensation as the one paid under the offer (but may insist on being paid in cash). The compensation will be deemed to be adequate if at least 90 per cent of the shares that have been the subject of the offer have been tendered thereunder. Otherwise, the court will have to review the adequacy of the compensation before deciding on the bidder’s request. Minority shareholders can appeal against the court’s decision. As a result, a squeeze-out under the rules of the Takeover Act may be unacceptably delayed unless the aforementioned 90 per cent acceptance quorum has been reached, which is why this squeeze-out alternative is of little practical relevance.
So is this a win-win situation? If the merger breaks (tight deadline of 24th of October), dual shares and spread will be eliminated. If the merger get’s approved, then all depends on when and what kind of cash compensation is paid out in the squeeze out.
This is a very liquid large cap, so free lunch should not exist in such cases.
If anyone knows of any similar precedents or has any other insights on this, would really love to hear it. Maybe I am completely missing the point on this situation.