Cosan (CZZ) – Tender Offer – 7% Upside

Current Price – $8.67

Tender Price – $8.88 – $9.30

Upside – 7% (or $63 for odd-lots)

Expiration Date – 28 Dec 2018

SEC Filling

This idea was shared by Bill.

 

Cosan has launched tender offer with odd lot provision and currently trades below the lower limit. Tender is for 7%-7.5% of the outstanding shares.

This is a very similar situation to last year, when company launched tender for 12.5% of the outstanding shares. After the announcement CZZ traded below the lower limit and then right before the end of election period in the middle of the range. The offer was eventually priced at the upper limit and company acquired all tender shares. So it seems that most investors were not willing to sell at $9.65/share. Subsequently share price shot up further after the tender results were announced. This time the upper limit price is 4% lower.

And although this gives quite a bit of confidence in the outcome of the current tender (i.e. upper limit pricing with no proration), a number of things have changed in the meantime:

  • Brazilian Real (currency of CZZ operations) has depreciated against USD by 15%. So if converted to Reals, current tender is at higher prices than the previous ones. Also big part of Cosan debt is denominated in USD and currency depreciation increases leverage.
  • Brazil’s economic and political turmoil (and election results) might affect shareholders’ willingness to stay invested in CZZ.
  • Despite operational challenges caused by Brazil’s environment, the results for 9m YTD have been quite resilient – company generated BRL4.4bn in operating cash (vs EV= BRL30bn), however margins compressed significantly compared to prior year.
  • Cosan chairman continued to acquire shares in the open market at $8.3 – $10.8 per share (see here, here and here) and now owns 13.2% of Class A stock.
  • Chairman has not tendered last year and I would expect him not to participate in the tender this year as well.

All in all, it is hard to guess the eventual outcome of this year’s tender. However, with share prices below the lower limit it seems quite a safe bet (not only for odd-lots).

Unaffected price stands at $8.1, so any shares not accepted in the tender would be sold at 7% loss.

12 COMMENTS

  1. na

    The last sentence ends rather abruptly. Was there more to this idea that was not published?

  2. Ben

    Minor updated SC TO-I/A posted today which includes the exact amounts for market indices for the 10% drop condition. I made a quick table if you want to see how we currently stand as of Dec 13 (hopefully the formatting will come through).

    Index 30-Nov 13-Dec Diff Less 10% Threshold
    S&P 2,760.17 2,650.54 -4.1% 2,484.15
    DJIA 25,538.46 24,597.38 -3.8% 22,984.61
    NYSE Comp 12,457.55 11,936.16 -4.4% 11,211.80

  3. Terence

    After today’s market downturn, I estimate only 1 to 1.5% buffer to reach the 10% threshold of the 3 indices (please check accuracy). Still a week+ left to the tender deadline. I understand that anytime one of the 10% is reached during this period, the company can cancel the tender. Since they pointed this out in the tender amendment filing, seems that they intend to so.

    Thanks Ben for alerting us!

  4. Michael Lax

    The unknowns are where the shares would trade at if the tender is canceled; market has moved down since tender was filed, so shares could head lower, as well as whether the company will actually cancel the offer if market moves down ( they have the right to, but may decide not to)

  5. makarid

    I believe that there is high probability of cancelling the tender. All indexes have declined more than the 10% threshold.

  6. Ben

    DJIA and S&P500 closed more than 10% down today from their tender related thresold amounts. Given that the company filed the amended TO to share these thresholds last week, I would guess this is important and they may not waive this condition. Also the stock saw an initial 10% jump on the tender news (pre-news price was $8.09). I decided to close my position for a loss but I guess we will see what happens soon enough.

  7. wlblount

    looks like czz has caught a bid last 3 days. getting back close to low end of tender range. I have not seen any TO amendments. def against the grain Monday.

  8. dt

    Tender ended up being priced at the lower limit with 50% proration. On a positive side CZZ shot up right after the tender expiration and currently trades at 10% premium to the tender price. So any shares not accepted in the tender can be liquidated profitably.

  9. Michael Lax

    Very hard to predict the outcome of these tenders. One would have expected that the share price would have decreased after the tender results at the lower range. I am curious as to how my fellow investors decided which tenders to invest in?

  10. Terence

    Lax, I decided to buy CZZ (more than odd lot) early, thinking that usually (in previous tenders) price will rise to at least the lower limit closer to the deadline. But the market went down, so that the company could have canceled (and I’m surprised they did not) the tender. And I sold at a not-so-immaterial loss days before the deadline (right before the price rose very close to deadline!).

    Obviously, not a savvy trader, probably more like the actions of a typical small “investor”!

    I think DT said to refrain from posting personal trades, but since Lax asked … also for the record for future use, though each tender can be different.

  11. Terence

    DT, would you like to post this new tender offer:

    CHN, closed end fund, to purchase 30% of total shares at 99% of nav, trading now at 8% disct. Thus 7% upside, subject to market risk, any widening of discount for any tendered shares returned, and cancellation of tender(?!). Deadline Feb 4 midnight. No odd lot, it seems.

    https://finance.yahoo.com/news/china-fund-inc-announces-commencement-163800067.html
    https://www.sec.gov/Archives/edgar/data/845379/000139834419000187/fp0038222_ex99a1i.htm
    https://www.cefconnect.com/fund/CHN

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