Diana Shipping (DSX) – Tender Offer – 6% Upside

Current Price: $3.34

Tender Price: $3.55

Upside: 6% Upside

Expiration Date: 4th Oct, 2019

Tender Document

This idea was shared by Dan.

 

Diana Shipping has launched a tender offer to buyback 1.4m of shares at $3.55. It might be easy to dismiss this one due to low expected proration as the offer constitutes only 1.5% of the market cap. However, this is the fifth tender offer DSX is running this year and more than 75% of tendered shares have been accepted in the last one. Shares are currently at the same levels as before tender announcement.

Here are some stats of the previous tender offers:

Previous tenders

Worth nothing that the tender price of the last two offers has been increased from $3.2 to $3.4 and from $3.25 to $3.75 - no explanation was provided.

Additionally, the latest update to the tender document has specifically added this paragraph (emphasis mine):

We do not have any current plans to conduct additional tender offers or otherwise purchase additional common shares. While there can be no assurances that we will do so, based on current market conditions in the dry bulk sector, the current price of our common shares on the New York Stock Exchange, and our current fleet profile, we expect that the conduct of one or more additional tender offers for our common shares may be in our best interests.  Any changes in the dry bulk sector or in our stock price, among other factors, could result in a different conclusion. Any sale of a vessel or a tender offer conducted in the future, respectively, is subject to the approval of our Board of Directors in its sole discretion.

With the hindsight of how the previous tenders turned out and potential of further return of capital to shareholders down the line, I think there is a relatively high chance that proration will be above 75% and shares will not drop much after the expiration. My key reason for this assumption is that the tender price is lower than during the last offer ($3.55 vs. $3.75) and unaffected price is 10% higher - making the current offer even less attractive for shareholders than the slightly oversubscribed previous one.

However, take my words with a pinch of salt, as my conviction is mostly based on the outcome of previous corporate actions rather than good fundamental understanding of DSX or shipping industry's peculiarities.

 

Insiders not selling

Directors own 29% of the outstanding shares (with 16% held by CEO and Chairman Simeon Palios). Although it is not explicitly stated that management will not sell in the current offer, combined ownership percentage has increased through the last 4 tenders (from 27.5% to 28.9%). Chairman/CEO has definitely not participated in the last 3 tenders.

 

Q2'19 results

Q2 results have been released on the 30th of July after the last tender expiration (25th of July) and might have affected shareholders' perception of the company and in turn the expected outcome of the current tender offer. I am not in a position to judge how good/bad the results have been, but DSX share price declined by 4% on the day of announcement and continued to drop by further 10% over the next two weeks.

However, aside from Q2 results this decline might have also been caused by the expiration of the previous tender offer as shares not accepted for repurchase are usually returned with approximately one week delay (note 10% drop in the table above).

Q2 result announcement and tender expiration also coincided with industry wide sentiment decline whereby share prices of all bulk shippers drifted lower during end of July and beginning of August.

 

Peer comparison

 

Charts of shippers also closely follow ups and downs of the Baltic  Dry Index, which indicates healthiness of the industry and rates that shippers are able to charge their customers. The index is currently at multi year highs and still above the end of July levels (the very last two drops in the BDI chart correspond with the same time period as the chart above).

 

BDI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taken all of this together I do not see any indications that current tender should attract higher shareholder participation than the previous one. With BDI at all time highs shareholders might be waiting for the higher shipping prices to translate into improved financial performance.

But this is shipping and I do not have a clue about it, so trade with care.

 

16 COMMENTS

    1. DanX

      No, it does not and upside would be way too small to play this in odd-lots. However, as outlined in the write-up I am expecting majority of tendered shares to be accepted.

    1. YVRtrader

      What are the U.S. federal income tax consequences if I tender my shares?

      Generally, if you are a U.S. Holder (as defined in Section 13), you will be subject to U.S. federal income taxation when you receive cash from us in exchange for the shares you tender in the Offer. The receipt of cash for your tendered shares will generally be treated for U.S. federal income tax purposes either as (1) a sale or exchange eligible for capital gain or loss treatment or (2) a distribution in respect of stock from the Company. See Section 13. If you are not a U.S. Holder, you will not be subject to U.S. income or withholding taxes on payments received pursuant to the Offer, unless such gross proceeds are effectively connected with the conduct by you of a trade or business within the United States. Along with your Letter of Transmittal, you are asked to submit the IRS Form W-9 or applicable version of IRS Form W-8 included with the Letter of Transmittal. Any tendering shareholder or other payee who fails to complete, sign and return to the Depositary the IRS Form W-9 included with the Letter of Transmittal (or such other IRS form as may be applicable) may be subject to United States backup withholding at a rate equal to 24% of the gross proceeds paid to the shareholder or other payee pursuant to the Offer, unless such shareholder establishes that such shareholder is within the class of persons that is exempt from backup withholding (including certain corporations and certain foreign individuals and entities). All shareholders should review the discussion in Sections 13 regarding tax issues and consult their tax advisor with respect to the tax effects of a tender of shares.

  1. nmeile

    Update of tender offer:
    – Now 2.8M shares to be purchased at $3.55
    – Extension to oct 11
    – 1,937,943.1053 shares validly tendered so far

    1. DanX

      While this is a positive, my estimate of proration on the original tender size was probably too optimistic – with few days left till expiration the proration would have been 72%.

      However, doubling of the tender changes this quite a bit – so I am actually more optimistic than before that most of the tendered shares will be accepted.

  2. lupolupus

    Hi, I have a general question. Do you have an opinion on shorting securities around the expiration of a tender offer (possibly in combination with a long tendered position)?

    1. dt

      If you are short a particular stock at the time of tender expiration, your position (or part of it) might be bought-in at the tender price. So no free lunch in trying to arbitrage it this way.

  3. lupolupus

    Thanks for the response. I guess this happens when the security lender participates in the tender. But would his securities then still be shown as available for shorting close to expiration of the tender (broker deadline)? If so, is this because of T+2 settlement, or because brokers only delete securities from the available for shorting pool once the broker deadline for participating in the tender has passed?

    1. dt

      My uninformed guess is that shares submitted for tender still form part of short borrow pool. What exactly happens after the broker deadline and whether tender shares are ever removed form the borrow pool, I am not sure.

      1. lupolupus

        Did you ever use a short position in connection with an expiring tendoffer, and is there any experience you can share? Even if there is a risk of buyout, shorting may still have positive value in expected terms in certain situations. Sorry for asking so many questions!!!

        1. dt

          Yes, I have tried that few times. In couples cases I was lucky to borrow non-tendered shares, but in others part of the short position was closed in the tender.

  4. YVRtrader

    Nice pop above 3.55 this morning. I sold $3.49 – $3.57 last two days and cancelled my tender submission, likely not alone, proration should be pretty good for those that tendered. Keeping an eye on this one for further SIBs.

    1. dt

      With shares still trading above the write-up price and plenty of DSX borrow available to hedge the price before the tendered and unaccepted portion is returned, this idea will still nevertheless result in decent return.

      By my count around 4.5% in less than a month (vs. 6% if all tendered shares had been accepted).

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