XBiotech (XBIT) – Tender Offer – $469 Upside

Current Price: $24.33

Offer: $26.52-$29.07

Upside: $217-$469 for odd-lots

Expiration date: 12th of February

Offer document

This idea was shared by Martin.

 

XBIT is a British Columbia biotech company that trades on NASDAQ in US dollars. On the 14th of January they've announced $420m dutch tender offer with odd-lot provision for 30-33% of outstanding shares at $30-$33/share. Despite large size of the offer, it comes at significant premium to pre-announcement levels (61%) and an all time high for the XBIT. It is expected that the tender will be oversubscribed and priced at a lower limit.

Aside from likely oversubscription, tax treatment is also a potential issue. According to Canadian rules shareholders will be deemed to receive a taxable dividend equal to the difference between the offer price ($30-$33/share) and paid-up capital (estimated to be $6.82/share). At the 15% withholding tax rate US holders should end up paying $3.48-$3.93/share of withholding taxes, meaning the actual post-tax consideration is $26.52-$29.07. This is still a meaningful 9%-19% upside (or $217-$469 for odd lots) from the current price.

There might be no withholding tax for US IRA etc. accounts, but I do have definitive information on this.

Management owns 38.5% (16m) of the outstanding shares and may tender (final decision is not made yet) up to 2/3rds of it (11m shares). Other major holders (Rennes Fondation - 12%, Thomas Gut - 8%, Josef Gut - 7%) have owned shares for several years already and sit on significant profits (maybe except Thomas Gut, who acquired a majority of his stake at around $26/share).

The offer will be funded by the proceeds received from the recent sale ($750m) of company's investigational True Human antibody Bermekimab that is currently in Phase 2 trials.

79 COMMENTS

  1. jwestern

    At this stage, what are the odds of the terms being modified before Feb 12? Also could you clarify why Canadian rules relevant here? Company is based in Texas and trades on a US exchange, with no “XBIT.TO” or similar dual Canadian ticker.

    1. dt

      XBIT is Canadian company. From the offer document:

      I am a United States shareholder. What are the Canadian income tax consequences if I tender my Shares?

      Generally, holders of Shares who are non-residents of Canada for Canadian income tax purposes will be deemed to receive a dividend in an amount equal to the excess, if any, of the amount paid by the Company for the Shares over the paid-up capital of such Shares. Any such deemed dividend will generally be subject to Canadian non-resident withholding tax at a rate of 25% unless the recipient is eligible for a reduced rate of withholding tax pursuant to the terms of an applicable income tax treaty. In order to benefit from a treaty-reduced withholding tax rate, holders of Shares who are non-residents of Canada will need to comply with the certification process set out in the Letter of Transmittal. We urge you to consult your own tax advisor as to the particular tax consequences to you of the Offer, including the applicability of any Canadian or other tax laws. See Section 14.

      and

      Any such dividend will be subject to Canadian withholding tax at a rate of 25% or such lower rate as may be substantiated under the terms of an applicable tax treaty. For example, a dividend received or deemed to be received by a Non-Canadian Resident Shareholder that is a resident of the United States for the purposes of the Canada-United States Income Tax Convention (the “US Treaty”), is eligible for benefits under the US Treaty, and is the beneficial owner of such dividends will generally be subject to withholding tax at a treaty-reduced rate of 15% (or 5% if the beneficial owner of the dividends is a company that owns at least 10% of the voting shares of the Company).

      1. ntr2110

        My reading of the offering document is that odd-lot holders wouldn’t get dividend treatment on the proceeds, because they completely close out their holdings in XBIT through this offer. From Section 14:

        Consequences of the Offer to U.S. Holders.

        Characterization of the Purchase—Distribution vs. Sale Treatment. The exchange of Shares for cash pursuant to the Offer will be a taxable transaction for United States federal income tax purposes. A U.S. Holder that participates in the Offer will be treated, depending on such U.S. Holder’s particular circumstances, either as recognizing gain or loss from the disposition of the Shares or as receiving a distribution with respect to the Shares. Under the stock redemption rules of Section 302 of the Code, a U.S. Holder will recognize gain or loss on an exchange of Shares for cash if the exchange: (a) results in a “complete termination” of all such U.S. Holder’s equity interest in the Company, (b) results in a “substantially disproportionate” redemption with respect to such U.S. Holder, or (c) is “not essentially equivalent to a dividend” with respect to the U.S. Holder (clauses (a), (b) and (c) together, the “Section 302 tests”), or (d) is in partial liquidation of XBiotech and the U.S. Holder is other than a corporation.

  2. YVRtrader

    Investor FAQ

    GENERAL/CORPORATE

    Where is XBiotech’s corporate headquarters?
    XBiotech’s corporate headquarters are located at 8201 E Riverside Dr, Austin, TX 78744

    Where is the company incorporated?
    XBiotech Inc. was incorporated in Canada on March 22, 2005. XBiotech has four wholly-owned subsidiaries: XBiotech USA, Inc., incorporated in Delaware; XBiotech Switzerland AG, incorporated in Zug, Switzerland; XBiotech Japan K.K., incorporated in Tokyo, Japan; and XBiotech Germany GmbH, incorporated in Germany.

  3. jwestern

    For those who are new to tender offers (like me), and who trade through a broker: you can tender your shares by calling your broker and speaking to a trader. They know what a tender offer is. Typically it is a few days after the tender offer is announced when they’ll receive a “bulletin” about it, which then allows them to execute the tender for you. Your trade also has to settle first before they can tender the shares for you (although they offered to post-date mine, given that the deadline is well into the future Feb 12). My broker does this for free, but yours may charge a fee, so inquire first about that.

    Could someone comment on the risks of these tender offers? To narrow the question down, let’s assume we own an odd lot and expect the lower limit of the offer range (i.e. the most conservative play).

    As far as I can see, the risk is that the deal is either cancelled or amended after you bought your odd lot. According to the SEC filings, an outright cancellation can only take place given something extreme happens (like WWIII breaks out) or if something more mundane happens (like a -10% move of the stock… not sure if with respect to pre- or post-announcement level). An amendment of the offer, on the other hand, can take place for any reason. This seems to leave open the possibility of a nefarious pump-and-dump by insiders.

    Based on other posts on this website, it looks like a steady track record of successful tender offers in the past would be an indication that the current one would also go as planned. In the case of XBIT, I don’t see any past tender offers in a quick google search.

    Any words of advice from members is appreciated.

  4. Random Deals

    For each XBIT share, Canada is going to withhold 15% on the imputed dividend of at least $23.21 (which is $30 minus the “paid-up capital” of $6.79 /share. Will the imputed dividend of $23.21 reported as foreign income on our 1099-DIV? If it is, will we have to pay taxes on that instead of just paying capital gain taxes based on our actual cost basis and the final tender price?

    Let’s say the imputed dividend is not reported as foreign income. So our foreign income is zero. But our foreign tax credit is limited to the “Foreign Tax Credit Limit” = total U.S. tax * foreign income / total income = 0. That means we cannot take the foreign tax credit? https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-how-to-figure-the-credit

  5. Jamal.Sydney

    Anybody have a view on:
    1) If you do this from a US IRA account, are you still subject to the withholding?
    2) The chances of high subscription by odd lots causing a bluebird situation?

    1. jwestern

      Regarding 2), I’d like to know as well.

      At the lower limit price of $30 per share, $420M will buy 14M shares. Divided over the ~21 trading days between announcement of the tender offer and the expected closing date of Feb 12th, that translates to 667k shares of daily volume of people buying odd lots. Assuming they’re all “greedy” (buying 99 shares), it’s a total of about 140k odd lot holders, assuming $30/share.

      Now compare that 667k odd lot shares/day that the $420M could absorb to the avg trading volume since announcement: 3.8M shares. But keep in mind the volume went from 7.5M to 2.9M to 1M, so this average is likely not representative of the next few weeks. Pre-announcement of the tender offer (but post-sale of Bermekimab) the avg trading volume was about 300k shares/day.

      Based on these numbers it seems the $420M could absorb quite a bit of odd lots, so I think the chance they would be *forced by the numbers* to remove odd lot priority is low. This does not preclude them amending the terms based on some other excuse, however.

      1. nostradamus

        These tender offers in general are meant to cash out existing shareholders, and the odd lots are meant to cash out small existing shareholders, not to provide outsiders like us with a quick arb.

        So they don’t pull these offers only if they are >100% subscribed by odd-lots alone (this never happens), as I think you’re suggesting, but will do so at much smaller percentages, whenever they deem the offer is no longer being taken up by those the company wants it to be taken up by. Whenever that is, is anybody’s guess.

        1. jwestern

          Gotcha, thanks.

          All else being equal though, the percentage of the tender offer that’s in odd lots would be an indicator of the likelihood that the terms will be amended in disfavor of odd lot holders, right? The smaller percentage, the less likely.

        2. Zulu Investment Partnership

          Is there a way to know how many odd lots will get submitted for this? I haven’t found a way.

  6. Martin

    Not a tax guy, But I looked at some online stuff regarding foreign tax credits. It’s not at all certain that the full amount of foreign tax paid on XBIT could be offset against tax, because of the need to have sufficient untaxed foreign income under IRS rules. That’s not that easy to come by for a passive investor Because generally taxes are withheld on any foreign dividends we receive. I look at the possibility of foreign tax credit as possible upside, but I certainly would not count on it.

  7. Patrick

    Can this be done in multiple accounts or only one per person? My wife and I have 3 brokerage accounts each so I was curious about this.

  8. jwestern

    I’m quite surprised at how low this stock is going as we approach the tender expiration.

    1. over2u

      Probably everyone with more than odd lot is now accounting for the post-tender offer price, which may be even lower than pre-annoncement price as significant portion of cash will be out.
      I don’t think that there is a significant risk for odd lot

      1. robr361@gmail.com

        I agree those with more than odd lots are probably selling to take advantage of the relitively high price and there may be tax benefits to selling before the tender

      2. Vincent

        Most expect price to collapse after tender offer. Does anyone else find it interesting the insiders are not tendering their full position? Some of them are not tendering shares at all.

        1. Bro

          It’s actually not surprising, considering how valuable this drug was (almost a billion dollars!) and they retained the rights to other uses of it, which could also be extremely lucrative along with other developments they’re focusing on

  9. DendriteResearch

    Just wanted to share a terrible broker experience here — I bought 99 XBIT to play this in an Etrade account. Immediately after buying the shares last week, I sent a message through their Secure Message system asking to tender the shares at $30. (For the record, I used the Reorganizations/Tender Offer dropdown). Didn’t hear anything back there, so I called in. They told me the internal cutoff was 9 AM this morning, so I couldn’t tender.

    So, 1) get your tender offers in early, with voice confirmation, and 2) never use Etrade. BTW, anybody had any experience with the FINRA arbitration process?

    1. nuggy5

      I use etrade and I always call in to a representative. Automated systems are hit or miss. Mine show a contra cusip as well so you can tell when it has gone through

      1. Writser

        Yes, but as far as I know Etrade only shows a contra cusip AFTER the deadline has passed. And they tell you on the phone (after subscribing): ‘please don’t sell this position’. Which is stupid – they should just remove the position / show you that you have subscribed your position as soon as possible after you have tendered ..

    2. jwestern

      Sorry to hear that. I called my broker to inquire about the tender a few weeks ago and they told me about their internal deadline (feb 10). I should have posted a comment here warning about that for noobs like myself.

    3. Writser

      ETrade has decent customer service imho. You just have to call them. They don’t handle corporate actions through tickets. With all brokers (perhaps IB being the exception) – if you want to get something done, calling works much, much better most of the time. Tickets have a tendency to disappear or stay unanswered.

      Also, in my experience it’s usually a good idea to tender a few business days before the deadline. Make sure you either have voice confirmation or an e-mail / ticket explicitly stating that your election has been processed. Then, if things go wrong you have 1 or 2 days to bother them again.

      1. Random Deals

        You guys mention “voice confirmation”. What is it? When I tender over a phone call, I just rely on the rep’s words at the end of the call that it’s done. Is that what you mean by “voice confirmation”? For phone calls, because I would not have a written record of my tender instructions, I always have a nagging feeling that if it doesn’t go through, I would have no proof that I tender.

  10. ChrisM

    I bought 99 shares of XBIT on Friday and called Schwab to tender on Monday. They said they would put in a request to tender shares. However, since their internal deadline was Monday (2/10) and my shares technically wouldn’t settle until Tuesday, they said the tender request would be on a “best efforts basis”. Any thoughts on my chances of successfully tendering my shares? I obviously want to sell my shares today if my tender is not going to be accepted.

    1. nostradamus

      With IB you could still tender until 10 min ago. Besides, this offer had guaranteed delivery, which means shares didn’t need to settle to be tendered. If Schwab really made an effort, they’ve tendered you shares.

  11. Terence

    Final results of tender out today. It did not mention odd lots, but the news on preliminary results did.

    Regarding the withholding tax below, I’m not sure what it means:
    “To assist shareholders in determining the tax consequences of the tender offer, XBiotech estimates that for purposes of the Income Tax Act (Canada), the paid-up capital per common share was approximately C$8.45 and the “specified amount” (for purposes of subsection 191(4) of the Income Tax Act (Canada)) was C$28.90 as of February 18, 2020. In addition, for purposes of the Income Tax Act (Canada) and any applicable provincial legislation pertaining to eligible dividends, XBiotech designates the entire amount of the deemed dividend arising from its purchase of shares pursuant to the tender offer as an eligible dividend.”

    https://finance.yahoo.com/news/xbiotech-announces-final-results-tender-131510844.html

    1. fishwithwings

      I just check my IB activity statement and it looks like no tax was withheld or paid (US resident). Am I missing something?

      1. nostradamus

        pretty sure IB paid out the tax-free part (6.39) and is still holding on to the remainder. check your open positions and the adjusted ticker should still be there.

  12. slow

    the paid-up capital per common share was approximately C$8.45 = 6.39USD

    I think they pay this portion separately from the portion with withholding tax.

  13. Dan

    I talked to fidelity and you will get the remainder as a dividend in 3 or 4 business days.
    My question is, if you purchased the shares in the past month, will the tax treatment be so that your shares have a short term capital gains loss of purchase price – 6.38 per share, and then you will have dividend revenue for the remainder? Which, since your holding of the security is under 60 days, will be taxed as ordinary income (so won’t be able to be offset against the capital gains) and not a qualified dividend.

  14. slow

    (Name: XBIOTECH INC – TENDER DIVIDEND) announced a cash dividend with ex-dividend date of 20200220 and payable date of 20200220.

    This message is from IB.

  15. rmg141

    Proceeds posted to Schwab tonight — it it looks like account was credited $24.095 per share (which amounts to 6.38 + 75% of 23.62). Implication being that Schwab withheld 25% on the deemed dividend? Can anyone confirm similar treatment?

    1. Anuj Kumar

      ^^ ~24.09 is what I saw in etrade as well. Definitely lower than I expected though…

  16. ChrisM

    I have Schwab and had the same experience. $24.09 in total proceeds. Looks like they withheld 25% even for US residents. I believe it should have been 15%.

  17. JDP

    JPM Account transactions:
    6.38 in cash on 2/19
    23.62 in cash on 2/20
    -3.54 cash withheld 2/20
    ———————
    26.46/share net

    1. RW

      JDP: Did you ask JPM to indicate you were a US resident and should be withheld at the 15% rate? Or did this happen automatically for you? I have Fidelity and only the 6.38 has been processed at this point.

      1. JDP

        I did not specify anything about US resident when I called in to tender, but JPM certainly knows I’m a US resident.

  18. rmg141

    I called Schwab corporate actions to follow up. They claim to be aware of the issue and claim they will work through the withholding corrections (to 15%) over within the next two weeks. We shall see…

  19. blades

    Etrade also withheld at the 25% rate also. I will be calling corporate actions also.

    No exception for IRA account.

    1. Jim Davis

      And you cant file for refund of foreign tax . I looked into it and avoided the problem beforehand

  20. fishwithwings

    According to IB

    Payouts:
    The acceptance price was USD $30.00 and includes a capital payment and a dividend payment.
    The paid up capital was USD $6.38 per share.
    The deemed dividend was USD $23.62 and is currently represented by symbol XBIT.DIV in client accounts. This is subject to applicable Canadian withholding taxes.

    The capital was allocated on 2020-02-19.
    The XBIT.DIV dividend payment should take between 5-7 business days.

    1. Jim Davis

      Hopefully , they dont withhold at this crazy 25% rate. Why are they getting it wrong ? Assuming that is IS wrong.

      1. mcg

        Well, you should do your homework before getting involved in situations like these and be certain of whether it is wrong or not.

        Canadian withholding tax is 25%, there is a tax treaty between the US and Canada which allows for a lower (15%) withholding rate.

  21. blades

    Etrade Corporate Actions was aware of the 25% v. 15% withholding rate issue with respect to US residents. Said their team was working on it and there would be a third payment to US holders with respect to the difference.

    Ameritrade had the same message, and indicated the third payment should arrive by Wednesday.

  22. Zulu Investment Partnership

    Hi, is the tax withholding supposed to be 15% or 25%? From my initial I understanding it was supposed to be 15%. Will the brokerages be returning the extra 10% in due time or was there something in the terms that was misread and 25% ends up as the ultimatum? I’m not an expert on the legalities of this. Would like to know if anyone has any idea if there will be a tax withholding corrections. Will probably call my brokerage as well to check.

  23. mistamick

    Whether it is 25% or 15% withholding that is correct, be aware that you can take a tax credit of up to $600 for foreign withholding tax on your 2020 tax return. Not sure if this applies to IRA accounts.

  24. Jim Davis

    IB money hit the account, just eyeballing it , it looks like they used the 15% figure. Anyone verify ?

  25. mistamick

    Fidelity informed me today that they will be adjusting my account to reflect Canadian withholding to 15%.

  26. nuggy5

    Do we all need to call our brokers individually ourselves or is it getting adjusted automatically?

  27. robr361@gmail.com

    Anyone else have nothing withheld? I had a traditional ira and got the full $30. I called ameritrade and they said all taxes that should have been withheld were withheld

  28. Jim Davis

    for the record, I called AMTD and asked them if IRA were exempt from withholding prior. I was told no.

    So if they didn’t withhold I’d be surprised.

  29. blades

    Reversal of Fortune: Today Etrade reversed previous dividend amount to reflect total proceeds of $2970, and a deduction of $350.76 in taxable account and $0 deduction in IRA account. I assume other brokers will be doing the same.

    blades (Martin)

  30. Jim Davis

    Interesting. If thats true , I was given erroneous information by Ameritrade, not shocked ,but saddened

    Is this everyone’s experience , no withholding in IRA accounts ?

    Not sure why something like this is so poorly documented up front by brokers, this isn’t the first deal like this .

  31. Jim Davis

    Anyone trade with IB , and still see that Div stub showing in their account with a zero value ?

        1. fishwithwings

          Anyone know why ib is taking so long?

      1. paul.debrouwer@protonmail.com

        I do see the div stub. but in my statements it seems it has been paid though?

  32. Maggie

    Hello, I hope everyone is doing well. I am a new investor and recently bought 99 XBIT @ $22.855 = $2262.65.

    The Dutch Auction allocated in two different payments (totaling $30/share):
    1. $6.38/share as Paid Up capital
    2. $23.62/share minus 15% Canadian taxes as Dividend

    1. Sold 99 @ $6.38 = $631.62
    2. Sold 99 @ $23.62 = $2338.38 x 0.85% = $1987.62

    $631.62 + $1987.62 = $2619.24 – $2262.65 = $356.59 (profit)

    I thought that I was going to get taxed only on my profit and expecting to gain $707.35, however I only received 50.4% of my expected profit lols. The above information is what I understand so far. Please correct me if I am wrong and if there is anything else that I should know, please feel free to share. Thank you and have an easy day!

    1. mcg

      You get taxed on the proceeds above the paid up capital not on profits. It was clearly explained in the write up above.

  33. Random Deals

    You pay Canadian taxes on the “dividend,” which you may be able to get back as a foreign tax credit. I think the U.S. will tax that foreign dividend too. But the U.S. should allow the deduction of the capital loss when you sell a share only for $6.38. That’s what I am guessing. I am not a tax expert.

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