Current Price –$142.99
Offer Price – $153.76
Upside – 7.53% or $1050 for Odd Lot holders
Expiration date – 13th of December, 2019
This is quite standard split-off transaction of which a few have been posted on the site already (LLY/ELAN, FTV/AIMC, CBS/ETM, PG/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.