Sirius Minerals (SXX.L) – Merger Arbitrage – 6% Upside

Current Price: 5.2p

Offer Price: 5.5p

Upside: 6%

Closing Date: March 2020

Offer document

 

Sirius Minerals is an UK micro cap focused on developing the biggest UK mining project of the generation – Woodsmith fertilizer mine. Last year SXX has failed to set up financing for the project – didn’t manage to raise $500m needed to unlock another $2.5bn and so as a result stock has plummeted from 20p in H1’19 to 3p by the end of ’19/start of ’20. Then in January the company has agreed to be acquired by a mining giant Anglo American (market cap = $37bn) for 5.5p/share. SXX used to trade at a very tight/zero spread despite some opposition from shareholders, who urged the management to pursue alternative options instead – try again to secure financing from other sources. Nonetheless, on the 14th of Feb’20 management has announced that an alternative financing proposal from a certain consortium of investors has also failed and now the Anglo American offer remains the only lifeline that will keep the company from liquidating. As a result the spread has increased to 9% and now settled down at 6%.

Shareholder meeting is set at the 3rd of March. Scheme requirement is 75% of voted shares being in favor and majority of shareholders (in number) participating in the transaction. Now that it became clear that there are no other options, it seems likely that the vote will go through as investors should not be willing to take the risk of liquidating – the company has stated several times that their cash reserves will allow to continue the operations only until April, so if the merger with Anglo American fails, SXX could be put into administration and liquidation within a few weeks after.

So from the IRR perspective the spread seems attractive, however the risk (downside) is very high as well.

 

Shareholder approval

50% of Sirius owners are retail shareholders, some of them having invested in the company since 2016 debt & equity raise (20-30p/share) only to see their investment ruined. Shareholders are obviously not too happy about the merger and some of them have even formed a fund to raise cash for the company through bonds. Regarding institutional holders, there is a certain pushback from the second largest shareholder Jupiter Growth fund (8%), which in the beggining of Feb’20 said that the company should consider other options. Then, after the company has announced that the alternative financing proposal has failed (mid Feb),  Odey hedge fund (1.2%), wrote a letter claiming that Anglo American can pay a materially higher price and so far has not declared their offer as final, because of the risk that the offer might fail at a current level or in case a competing bid appears. Odey has also stated that according to their valuation SXX is worth more than 2x than the current offer price and that they will not support the merger unless it is priced at 7p/share or above.

This move is quite interesting as Jupiter has not made any statements since the alternative financing fail annoucement yet, however it seems that the wife of Crispin Odey (manager of Odey fund), will become a chair of Jupiter on the 2nd of March, a day before the SXX shareholder meeting. So in fact both funds could create a considerable hurdle to passing the 75% voting in favour condition, however it looks quite unlikely that they would risk to lose their investment like that after it became clear that Anglo American offer is the only remaining option. So this move by Odey seems more like a bluff trying to beat out a better price before the shareholder meeting.

Another issue is the second part of the shareholder approval condition – majority participation in numbers. SXX has as much as 85k small investors, while the participation in the last annual meeting amounts to only about 34%. Nonetheless, the merger is widely covered in media and reportedly about ~25k of the shareholders are locals, who should be following the situation quite closely. So it seems fair to assume that this vital vote will gather those additional 16% of shareholders, passing the required condition. Besides that, if the merger fails due to this second condition, Anglo American can just change the type of the proposal to a contractual offer, which doesn’t require the majority in numbers participation, but nonetheless needs 90% acceptance rate.