CIRCOR (CIR) – Tender Offer – 26% Upside

Current price: $38.1

Tender Price: $48

Upside: 26%

Expiration Date: 19 of July, 2019

Tender Announcement

This idea was shared by Bill

 

This is a quick note as tender offer expires today - due to guaranteed delivery clause it should still be possible to buy and tender, but brokers might have different internal deadlines (for IB it is usually before 1pm on the expiration date).

Crane made unsolicited offer to acquire CIRCOR at $48/share (increased from the initial $45/share) compared to $32/share unaffected price. The spread is at 26% as there is a risk that minimum tender condition (>50% eventual ownership vs. current 1.3%) will not be satisfied. However, with Gabelli's recent support of the transaction other shareholders might follow suit.

Management rejected the $45 and $48 offers outright and did not even engage in any discussions with Crane claiming that even at $48/share CIRCOR  is undervalued (presentations here and here). Crane argued that CIRCOR's continuously promises of brighter future just around the corner but fails to deliver actual results. So the usual hostile proxy fight.

But situation got really interesting over the last few days. Firstly, after CIRCOR's management rejected the improved offer the spread widened to 10%+. Then on 15th of July Crane issued press release that the offer will not be extended and there will be no further price increases - spread widened to 25%+. Finally, yesterday Gabelli controlled funds (own 13.46% of CIR and 5% of Crane) announced intention to tender CIRCOR shares and threatened to nominate its slate of directors for the 2020 annual meeting. This is what Mario Gabelli mentioned on the conference call when the transaction was announced:

Mario Gabelli: Yeah. Hey, Max. I just got on towards the end of this. So, if I repeat something, such is life. We are large shareholders at CIRCOR and large shareholders at Crane. I’m a little taken back that they had an annual meeting where they put a staggered board in and we had, I believe, someone go to that and they never indicated that prior to the meeting. So, your approach to them was before the board meeting, if I got the--one of the notes that I’m reading. Or, their annual meeting, I mean?

I think we’ve done the math and I think it’s an interesting dynamic and I appreciate it. I mean, I think it’s good for both companies.

So the big question/risk here is whether after Gabelli's support further 35% of shareholders will also participate in the tender so that Crane's ownership reaches 50%.

22% of CIRCOR is owned by index funds (BlackRock and Vanguard), which are unlikely to tender as these simply follow the index. However, further 33% are owned by just 4 mutual fund managers, which are more likely to be in favor of the transaction after Gabelli's announcement.

So this is a bit of a gamble. Downside to unaffected price ($32) is 15%. However, if the tender is unsuccessful Gabelli's intention to nominate slate of directors (which is likely to lead to sale of the company next year) will remain on the table and might provide some support for the share price above the unaffected levels. Crane is also still likely to be interested in CIRCOR next year as they have been pursuing the acquisition already since 2011.

Kristine Liwag: Good morning. Max, you’ve made two previous offers you mentioned in 2011 and 2013. So, this offer’s your third approach. How has the premium that you’ve offered changed over the years? And what makes you more comfortable today to go public with this offer?

Max Mitchell: Yeah. So, it’s not like-for-like comparisons in terms of the capital structure of the company at that time versus now. I would say that the premiums offered, though, were in a similar range. And we were rebuffed both times. And we felt that that the information back at that time was that we, CIRCOR, have plans that far exceed the value of what you’re willing—what you’re paying. And we didn’t feel it was worth the fight at the time. We didn’t feel it was worth making public. But, we have watched this play out over many, many years and that was really one of the main drivers is we feel that we’ve offered a full and fair price.

We have a lot of history that we’ve watched. We’ve seen this movie play. And we had a rejection that offered absolutely no engagement whatsoever and that’s why we felt compelled that this was time for us to make our plans known directly to CIRCOR shareholders. We felt that it was a disservice to the shareholders not to understand our present and previous approaches.

 

 

17 COMMENTS

  1. dt

    If the tender is successful, then share price should jump close to $48. So from upside/downside perspective it should make no big difference whether shares will be submitted to tender or not.

  2. Vinn

    I did see this statement as well:
    https://www.streetinsider.com/dr/news.php?id=15717216

    “Despite CIRCOR’s (NYSE: CIR) continued defiance to a takeover by Crane (NYSE: CR), over 50% of the shares are expected to be tendered at $48 per share into the July 19th midnight expiration, market sources said.

    While Crane is not expected to extend its tender offer, the news sends the Board of CIRCOR a very serious message (i.e. you didn’t do what is in the best interest of shareholders). Earlier in the day, Mario Gabelli’s GAMCO announced it would tender its shares and again encouraged CIRCOR’s Board to engage with Crane, which so far it has been unwilling to do.

    In addition to GAMCO’s 14.4% stake, other long-only funds, hedge funds, and merger arbs have agreed to tenders their shares, and the tally now amounts to over half of the outstanding common shares.”

    This looks highly untrustworthy to me though. No sources, no explaination of how they get over 50%. Too risky/unknown for me at the moment to buy a position.

    1. nostradamus

      Reading up on this: isn’t the major roadblock here mostly the fact the tender is conditional on approval from Circor management, and not so much the tendering percentage?

      I mean, longer term the tender % is very relevant: if a majority tenders while management isn’t even willing to discuss, obviously things should and probably will happen, but short term this tender might fail anyway, right?

      1. dt

        Good point, but that would make the whole tender just a symbolic process to see who’s oppion has more support. My guess is that if more than 50% of shares tender CIR management will agree to merge.

    1. dt

      Official announcement should be out shortly.

      With majority of shareholders supporting the sale at $48/share I do not see how can CIRCOR management continue to ignore Crane’s offer. The most likely scenario is start of dialog between Crane and CIRCOR.

      The fact that Crane’s offer already expired (as management did not agree to it) does not mean much going forward.

  3. dt

    CIRCOR’s announcement:

    “CIRCOR is executing a detailed plan to deliver substantial earnings growth while deleveraging the company over the next 18 months. CIRCOR’s board and management are focused on enhancing shareholder value and are confident that our plan will deliver significant value in the near and long-term.

    CIRCOR remains open to any transaction or set of transactions that are in the best interests of CIRCOR and its shareholders.”

    The language of the last sentence differs somewhat from the previous press releases and potentially signals change in management’s attitude towards the merger. But probably I am reading too much into this PR.

    Hard to imagine that those 66% of shareholders who tendered will not put any pressure on management to engage with Crane.

  4. work 22

    Sorry, i’m wary of this one, (hostile takeovers notoriously difficult), and the Crane CEO’s comments reported by Bloomberg below aren’t particularly helpful:

    Crane Says ‘Absolutely No Plans’ for a Circor Proxy Fight 2019-07-23 14:59:52.976 GMT

    By Joshua Fineman
    (Bloomberg) — Crane CEO Max Mitchell said the company has “absolutely no plans” to pursue a proxy fight for Circor’s board next April: comments on results conference call.
    * As days go by, a potential CIR deal becomes “less and less” likely
    * Mitchell ended the call with a quote from famed/deceased architect I.M. Pei: “Stop worrying about missed opportunities and start looking for new ones”

    1. dt

      Message from Crane’s management is kind of mixed – Crane still appears to be open to make a deal with CIRCOR but said they will not start a proxy fight next year and are already looking at other acquisition, so the window for merger might close. Keeping in mind otherwise rather harsh comments on CIRCOR’s management, it might be just a negotiation tactic.

      Here are some more details from Q2 conference call:

      https://seekingalpha.com/article/4276790-crane-co-cr-ceo-max-mitchell-q2-2019-results-earnings-call-transcript

      Before I provide more detail on our businesses, I would like to make some comments on our recent offer for CIRCOR. Certainly our approach was atypical, but we have previously explained why we felt the need and the responsibility to go public. We are very thankful for the support we received from CIRCOR shareholders throughout this process. At expiration of the tender, we had just over two-thirds of CIRCOR’s shares supporting our offer, a remarkable result. There was much stronger than typical for these types of situations, almost unheard of, and a stunning rebuke to the CIRCOR Board and their submitted plans for value creation. CIRCOR issued a statement yesterday that they remain open to any transaction in the best interest of shareholders strikes me at a minimum as extremely disingenuous.

      We’ve attempted to contact CIRCOR many times. I’ve emailed and called their CEO repeatedly, even over the weekend and yesterday. Our bankers have reached out to their financial advisors throughout the process to no avail. They won’t even return our calls. We’ve also made it clear throughout this process that we would — we might consider paying more than our last offer of $48 if they would engage and demonstrate that the Company is worth more than that. Further last week, CIRCOR announced the sale of [PDVSA] for a nominal amount. This is a value asset with a great brand and products that we have had an interest in for many years. Despite our position as one of the most logical acquirers, we were never contacted about the sale process. I hope if CIRCOR looks to divest further assets they will engage all potential buyers including Crane to maximize shareholder value.

      Regardless of our views, CIRCOR’s shareholders have spoken loudly and affirmatively with two-thirds supporting engagement and a potential transaction. I remain perplexed at how a public company in this day and age of good governance can simply refuse to even speak with an interested party, particularly with that level of shareholder support or engagement. We believe that CIRCOR would have been an excellent fit for Crane strategically and that the deal economics made sense and we’re consistent with our long standing acquisition criteria.

      However, with the window for a potential transaction closing very rapidly, there are a few key messages I want to leave you with. First, we will continue to pursue inorganic growth actively. Our M&A pipeline is full within our targeted range of $100 million to $1 billion, many opportunities across all three of our primary growth platforms, including both public and private targets. And we’re now actively working on those other potential acquisitions. Second, while we will continue to actively pursue acquisitions as part of our balanced capital deployment, we will remain disciplined in valuation. We have had a strict set of financial criteria for many years. These are unchanged and we will not compromise on them.

      Robert Barry

      So I just wanted to maybe put a finer point on the comments about CIRCOR, the bottom line there, as far as you are concerned, it’s just like a no go at this point?

      Rich Maue

      Never say never. Right now we’ve done everything we feel possible to engage. I think CIRCOR shareholders had clearly, from all that we have spoken to have engaged with the Board of CIRCOR and have asked them to engage. There’s no engagement. If something were to change in terms of engagement, we would certainly welcome that. The point being that with course of our process, what we can do, we had the full support of CIRCOR’s shareholders. And at the end of the day, if the Board of CIRCOR wishes to remain entrenched and stick with their defenses and say, no, can do that and continue to work to their plan. So it’s more one of as days continue to progress, Rob, it becomes less and less likely.

      Nathan Jones

      I’m going to beat the circle to get a little bit more. Really, it sounds to me like you have a pretty full pipeline on the M&A front. It sounds like there’s some executable things in there. Rich mentioned again here today that you’ve got a couple of billion of M&A capacity over the next few years, which CIRCOR would have sucked up almost all of it. Is it fair to say here that, if you execute on any kind of deals of size, it basically takes CIRCOR off the table for you guys for an extended period of time?

      Max Mitchell

      It’s hard to say with any deal size, but conceptually I think you’re accurate.

      Nathan Jones

      Would you have any intention of looking to force changes at the board level when it comes to their election next year? Is that something that you’ll now leave up to CIRCOR shareholders? Just how you might approach that, let’s say if you don’t get any kind of deals done over the next six to nine months?

      Max Mitchell

      No, I think Nathan that we’ll continue to monitor, CIRCOR and their performance and depending on our own path forward, continue to explore. I think it’s important for us to have certainty of our Crane shareholders and not have uncertainty continue to linger, where we may or may not do. So right now, we have absolutely no plans whatsoever to pursue this in April and fight a long entrenched battle if they remain completely unwilling to talk, but again, we certainly will monitor the situation, but we have no plans to do what you’ve just said.

    1. dt

      It is hard to tell anything from this press release when no financial info is indicated. I do not think it changes much.

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