Danaher (DHR) – Split Off – $1050 Upside

Current Price –$142.99

Offer Price – $153.76

Upside – 7.53% or $1050 for Odd Lot holders

Expiration date – 13th of December, 2019

SEC Filling

This is quite standard split-off transaction of which a few have been posted on the site already (LLY/ELANFTV/AIMCCBS/ETMPG/COTY and LMT/LDOS). I recommend reading through those and examining share price behavior of involved companies during and after the tenders to familiarize yourselves with risks involved in this kind of transactions.

In short, every $100 of Danaher (DHR) stock accepted in the tender will be converted into $107.53 of Envista (NVST) stock subject to the upper limit of 5.5784 shares of NVST per DHR share. Tender will expire on the 13th of December 2019 and exact exchange ratio will be determined before that. Odd lot tenders will be accepted on priority basis. At the moment there is some borrow (at 6%) for NVST stock to hedge the position.

 

Important points / risks to consider:

  • Tight borrow. It is very likely NVST borrow will disappear and some hedged positions might be forced to buy in. As only c. 3.2% of DHR shares will be exchanged in the split-off and upside is quite significant, the offer will surely be oversubscribed and eventually arbitrageurs will run out of NVST shares to borrow. It is possible that borrow rates will jump to 100%+ and all expected upside will be consumed by hedging fees.
  • Odd-lot holders (less than 100 shares) will be exempt from proration. This provision has never been cancelled in split-off transactions so far. But with the number of odd-lot accounts increasing with every single case, the priority treatment might get eliminated. In LLY/ELAN split-off a total of 17k odd lot account participated - at the same rate 8% of current exchange would benefit odd-lot arbitrageurs only. While this still looks acceptable, there is likely a limit somewhere.
  • Timing. Entering this trade closer to expiration and having unhedged DHR position might pay-off better. However, part or all of the upside might be gone till then. Also worth noting that DHR trades at all time highs and has already jumped 5% upon split-off announcement.
  • Float increase. As a result of the split-off NVST float will increase five-fold from 20% to 100% of outstanding shares (DHR currently still owns 80% of NVST). This might result in considerable selling pressure at least in the short term after new NVST shares are distributed. It does not help that DHR appears to be rushing to get rid of NVST only two months after IPO (at $22/share vs $27.83/share currently).
  • Upper limit. Transaction is subject to upper limit of 5.5784 NVST shares per share of DHR. At current prices the exchange ratio (at 5.525) is slightly below the upper limit. If the spread widens (i.e.  DHR gets more expensive and NVST gets cheaper) till/during valuation dates, the final pay-off might be less than 7.5% or get eliminated altogether.
  • Valuation dates. Final exchange ratio will be determined based on the VWAPs on the 9th, 10th and 11th of December, so one might wait till then to enter the position (IB deadline for tendering is usually noon on the expiration date). Keep in mind that due to upper limit on the exchange ratio, upside might be reduced or eliminated till then.
  • No further announcements. Both companies have already reported Q3 earnings and there are no material expected/scheduled events till the tender expiration.

 

29 COMMENTS

  1. Random Deals

    DT, can you please explain why is it that “at the same rate 8% of current exchange would benefit odd-lot arbitrageurs only”? Thanks.

    1. dt

      I meant to say, that if there will be 17k odd lot accounts, then 1.7m DHR shares will be tendered by odd lot holders alone. And this 1.7m makes up c. 8% of 23m DHR shares total that will be accepted in the tender.

  2. Zulu Investment Partnership

    Hi Dt, great idea, thanks for sharing. Do you know how long it takes for people who tendered their DHR shares to get their NVST shares? Each day matters with such an expensive borrowing rate.

    1. dt

      Usually it takes a week after expiration. Borrow is not that expensive <20%. However, there is no borrow availability any longer.

  3. exponential

    DT. Thanks for all. I remember reading that the short interest on NVST is over 80 percent. Is that just because of hedgers of the offer you think or something awry with the company? Also, when looking at NVST, fundamentals seem just ok to me. Wondering what your thoughts are on NVST fundamentals just in case in a disaster situation it starts dropping fast due to float and I want to hold it for a little while for recovery? Thanks in advance as usual.

    1. dt

      Short interest might be over 80%, because only 20% of shares are on free float at the moment. After exchange short interest would drop to 16% even without any covering from the short sellers. And as noted above most of the short interest is likely to be due to hedging for this exchange.

      I have no oppinion on NVST from fundamental perspective. But as the shares are not dropping even with anticipation of fivefold increase of freefloat in two weeks, i take it as a positive sign.

  4. DendriteResearch

    Is there an easy way to search for historical exchange offers? Either with or without odd-lot preferences?

    1. dt

      Try typing ‘split-off’ in the search field above, and you should get all the cases over the past few years.

    2. Platitudes

      The only way I know if is to search by form type on Edgar and just crank through them. It’s completely not-automated and not easy.

      1. dt

        You are over-complicating this.

        As note above, I believe I have covered all the split-offs on SSI. Here are the links for split-offs with odd-lot provisions going back to 2012:

        https://www.specialsituationinvestments.com/2019/11/danaher-dhr-split-off-1050-upside/
        https://www.specialsituationinvestments.com/2019/02/eli-lilly-lly-split-off-7-3-upside-900-for-odd-lots/
        https://www.specialsituationinvestments.com/2018/08/fortive-ftv-split-off-8-5-upside-690-for-odd-lots/
        https://www.specialsituationinvestments.com/2017/10/cbs-corp-cbs-split-off-transaction-470-opportunity/
        https://www.specialsituationinvestments.com/2016/09/procter-gamble-pg-exchange-transaction-650-upside/
        https://www.specialsituationinvestments.com/2016/07/lockheed-martin-lmt-split-off-transaction-2700-opportunity/
        https://www.specialsituationinvestments.com/2016/04/baxter-international-split-off-transaction-320-upside/
        https://www.specialsituationinvestments.com/2015/10/general-electric-ge-split-off-transaction-216-expected-return-potential-for-600-return/
        https://www.specialsituationinvestments.com/2015/09/dow-chemical-dow-split-off-transaction-460-expected-return/
        https://www.specialsituationinvestments.com/2015/06/danaher-dhr-split-off-transaction-635-upside/
        https://www.specialsituationinvestments.com/2015/05/danaher-dhr-split-off-transaction-450-upside/
        https://www.specialsituationinvestments.com/2014/06/cbs-corporation-odd-lot-exchange-transaction-460-gain/
        https://www.specialsituationinvestments.com/2014/05/wyerhaeuser-wy-odd-lot-exchange-transaction-216-gain/
        https://www.specialsituationinvestments.com/2013/05/pfizer-pfe-odd-lot-exchange-transaction-217-potential/
        https://www.specialsituationinvestments.com/2012/12/ppg-industries-ppg-odd-lot-exchange-transaction-1450-potential/

  5. dt

    Forgot to mention that back in 2015 when DHR was splitting-off NetScout, the transaction got amended by increasing the upper limit. By the time of expiration of the original split-off the spread disappeared and company was forced to increase the upper limit as otherwise there would have been too few tender participants. So arbitrageurs got 15% return instead of 7.5%.

    Probably not likely to be repeated this time, but who knows. With one week left till expiration the spread stands at 4% (but no possibilities to hedge).

    https://www.specialsituationinvestments.com/2015/06/danaher-dhr-split-off-transaction-635-upside/

  6. Benjamin Perley

    You can still do the synthetic short in the options market, but it’s something like .30 over fair value..

    1. dt

      Dec put option premium is c. 2.5% for at the money options (smaller for in the money ones). But:
      – It is not yet clear if NVST stock will be delivered to accounts by the 20th of Dec, when the Dec options expire. It usually takes a week, so it is right on the edge.
      – And January options are very illiquid with large spreads.

    2. mcg

      They were trading ~.23 yesterday. I’d also argue that that price *is* fair value because it has the borrow rate baked into it. NVST WI is trading at about the same price. and the nvst borrow is more or less the same.

      @DT- It doesn’t matter if the options expire before the shares get delivered, you’ll just end up with a long stock short stock offset which will collapse. Tons of liquidity in the Dec line where everyone is trading it. See the OI

      1. dt

        With no borrow availability on NVST stock, are you sure you would be left with a short NVST position after put option exercise? The temporary short position might get closed out right away or at least by the end of the day.

        1. mcg

          The short position won’t be bought in till settlement, so definitely not the same day. There is plenty of borrow on the street, so if you get a short position, you’ll likely get to keep it.

          1. nostradamus

            Worst case you get bought in on settlement which is t+2. The tender expires the 13th, so that gives the offer about seven working days to settle. It took the Eli Lilly/Elanco-spin off three working days with IB earlier this year, so that seems like a pretty safe margin.

            Of course the tender date could also be extended and then you’re in a bit of trouble. But then again, if you’re short the actual stock you could get bought in somewhere next week. There’s always some risk somewhere.

  7. fishwithwings

    Does anyone know why both stocks in a split-off transactions always seem to go up after the expiry dates?

    1. mcg

      There is a dynamic between the arbs prorate guess vs the actual and they have to re-hedge their books to their expected positions which would cause one side to go up

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