Current Price – C$3.49
Tender Price – C$3.35 – C$3.75
Upside – 7.5% (if priced at the upper limit)
Expiration Date – 10th Jan 2019
This is the second tender offer that ECN Capital launched this year. This time the offer is for 26% of the outstanding shares (vs 8% previously). Company is returning cash to shareholders following another sale of legacy assets. Management indicated they will not participate in the tender albeit their ownership is not significant. Due to the size of the current offer as well as investor participation dynamics in the previous offer, I believe there is a high chance that the tender ends up under-subscribed at the upper limit.
For the background on the company as well as previous tender please refer to this write-up.
Previous tender was for 8% of the shares (32m in total) at the price range of C$3.55 to C$3.90. Final price was set at $3.6. In total 97m shares were submitted for tender, out of which 36.5m were at prices of $3.8+.
Assuming investor sentiment towards ECN has not changed materially (see comments in the section below), there should only 65m shares (97m-32m) that are willing to participate in the current tender – and that is the figure after taking into account all of those that tendered at C$3.8+, which is above the current upper limit of C$3.75.
On top of that, during Q2-Q4 ECN has repurchased c. 25m shares in the open market which likely further reduced the pool of willing seller below C$3.75.
The current tender is for 70m-80m shares and due to figures outlined above I am expecting this tender to be priced at the upper limit, potentially even ending under-subscribed, in which case the company might even raise the tender price.
ECN Capital since the last tender
A number of developments took place since the last tender:
- ECN reported Q1, Q2 and Q3 earnings. Comparing divisional forecast from Dec 2017 and May 2018 (after Kessler transaction) to the guidance in latest Q3 results, it seems Triad Financial Services is performing in line with expectations, guidance for Service Finance has been reduced by 7%, and Kessler’s performance is likely to exceed the initial expectations. Growth continued within all divisions. Results are still messy with losses on business disposals and legacy assets still overshadowing operating earnings from the new businesses.
- In May 2018 ECN announced and closed acquisition of 80% equity interest in Kessler Group – managing and advisory services for credit card portfolios. The transaction was done at 6x EBITDA for 2018. The whole Kessler’s management team (including founder and CEO) remained in place with the new incentive plans driven by 5 year ROE targets. Although synergies between the two businesses are not easily evident, acquisition price seems to be reasonable.
- Worth noting that initial market reaction to all three quarterly earnings as well as Kessler’s acquisition has been positive/neutral.
- ECN closed another sale of$360m of legacy assets at 0.93x book value – this reduced BV/share by $0.16. Cumulative legacy asset sales so far have been carried out at 1.01x book value. Again positive/neutral market reaction to the announcement.
- ECN reduced idle railcar inventory by leasing $38m of railcars.
- Several insiders have been buying shares in the open market at prices slightly above the current one.
All in all, ECN performance so far should not have changed investor sentiment toward the company. Slight under-performance within Service Finance division is counter balanced by the positive results at Kessler Group, continuing legacy asset sales and cash return to shareholders via buybacks and tender offer. The share price sell-off over the last few months was likely driven by broader market conditions rather than company specific performance.