Current price: $2.97
Offer price: $3.25
Upside: 9.5%
Expected Closing: end of July, 2020
This idea was shared by Vladimir.
On April 8, BoD of TMK approved tender offer for all of the outstanding shares except shares owned by its parent at 61RUB/share. In other words, major shareholder (TMK Steel Holdings, owns 65%) is taking the company private. At current spot price, the upside to tender price is 10%. Closing is expected in July 2020.
Background
TMK is a major producer of pipes for oil and gas sectors (78% of total sales) with a total share of 33% in the pipe market in Russia. TMK’s business split in three geographical divisions: Russia, USA (already sold, transaction closed by end of 2019) and Europe (relatively small operations). TMK specializes in the production of two types of products: seamless (high margin, non-commodity like) and welded pipes (low margin, commodity like). The company has dual listing in Moscow (in Russian rubles) and London (in USD), with London listed GDRs representing 4 common shares.
Major shareholder decided to take the company private after it successfully sold US operations (IPSCO) to Tenaris for $1067m. The proposed offer is beneficial for the major shareholder. He spends only $283 to take the Company private, while the minority shareholders share of proceeds from the sale of IPSCO alone is worth $371m.
At the same time with launching the offer, Company issued a bearish statement regarding the prospects of the business.
In these challenging times we believe the voluntary tender offer provides minority shareholders with the opportunity to exit at a substantial premium over the market quotations. We do not consider our London listing a priority under the circumstances.
Maybe it is going to be a challenging time indeed, but if that is the case, then why is the majority shareholder to take all the pain remains unclear.
If history is any guide, TMK business proved itself very resistant even in low oil price environment of 2014-2015 period. EBITDA generation center of Company is the seamless OCTG segment. Despite dependence on the oil sector, it remained very resilient even in low oil price environment. Russian oil companies do not reduce capital expenditures for exploration (unlike the US market) because their margins protected by flexible tax regime with payments directly linked to oil price. Russian oil companies stay profitable even at low oil prices.
Expected Timeline
Tender offer timeline is the following:
- Approval from Central Bank of Russia (CBR). CBR takes 15 days for statutory review of the transaction. After approval from CBR received, Company cannot change conditions of the offer. Company submitted the TO to CBR on April 8, but after review period expiration CBR issued a statement requiring Company to make corrections to the offer. All CBR comments are technical in nature. Hopefully, Company will re-submit the document in the near term. After CBR approves the offer, Company may launch it for DRs Holders.
- Offering period is 70 days.
- Settlement. Will take 1-2 weeks to distribute proceeds to investors.
Therefore, estimated timeline for closure of the tender offer is the end of July. Following completion of the voluntary tender offer, the Company intends to cancel the GDR listing on the London Stock Exchange.
Potential Risks
- Cancellation of the offer or reduction the Purchase price. As discussed above tender offer is in the best interest of major shareholder. Other relaxing point will be that Company announced TO already after Covid-19 outbreak, and therefore potential impacts on its business likely were already taken into consideration.
- Purchase price is fixed in RUB per share so you need to hedge your currency exposure.
Thanks for sharing. Couple questions:
1) Are there any minimum tender requirements for the offer to be valid? (i.e. if some shareholder do not participate, will the tender still go through)
2) Any other peculiarities for participating in Russian tender offers?
3) Are they intending to delist from Moscow exchange as well?
Overall it appears quite strange that the company operating in oil industry is cashing out minority shareholders in the current oil/macro environment. I would understand is this as a really opportunistic offer at very low prices, but now 61Rub/share is a premium to where TMK used to trade before the current crash.
On the questions above:
1. We will see all the detail in the long-form document after CBR approves it. I have seen no threshold in public communication of the Parent. Any number of shares at this price is good for the Parent.
2. Parent wants to take the Company private and to do so the Parent has to cross 95% threshold. After that, Parent can make a minority squeeze out at the higher of 6 months price or the price of the last transaction.
3. The final goal is to take the company private, so the Parent will do/say whatever it has to to push minority shareholders out.
I looked into this and this part scares me:
“In accordance with Russian law, the voluntary tender offer will be made only to the holders of ordinary shares of the Company. Holders of Regulation S global depositary receipts (`Regulation S GDRs`), Rule 144A global depositary receipts (`Rule 144A GDRs` and, together with Regulation S GDRs, `GDRs`) and Level 1 American depositary shares (together with the GDRs, the `DRs`), representing rights to the Company`s ordinary shares, will be able to participate in the voluntary tender offer, once it is made and distributed to the shareholders of the Company, by cancelling the DRs held by them, receiving the respective underlying ordinary shares and submitting an application to sell such ordinary shares pursuant to the terms of the voluntary tender offer. Detailed instructions for cancelling DRs and participating in the voluntary tender offer will be made available on the Company`s website following submission of the voluntary tender offer to the Company. Surrender of the DRs will be subject to the payment of the relevant fees to The Bank of New York Mellon and to satisfaction of the other provisions of the respective deposit agreements for the DRs by DR holders. DR holders are urged to consult with their tax advisers as to the tax consequences of the surrender of DRs and receipt of shares, including whether any transfer taxes may apply. ”
Sounds like you need to convert your GDR into ordinary before you can tender. This brings uncertainty with regards to whether your broker allows this at all, what the fees are (ADR conversions can in some cases be ridicously expensive, I haven’t looked into this one) and the time-frame (conversions can be really slow). This might just be a technicality or it might be an issue: I never dug deep enough to find out.
As a side note, IB allows you to simply buy the ordinary at the Moscow Stock Exchange, which would mitigate the GDR issue.
Given that ruble is volatile and pretty correlated to oil prices, 10% seems a bit narrow? This is an indirect bet on no more crazy things happening in the oil market between now and July. Currently Russians are considering burning their oil. And storage is running out, possibly in weeks.
Currency risk you can hedge of course.
I agree with ijw that the spread is too narrow. If it was like 30-50%, I may consider looking more into it. Considering the industry it is in, the political uncertainty, and other factors of uncertainty, it seems like not the greatest investment.
TMK resubmitted its offer to the CBR. Hopefully, no more mistakes in the document.
So CBR approved the offer and it commenced on the 19th of May (will expire on the 27th of July). Current upside stands at 5.6%. As expected, there is no minimum acceptance condition, so the offeror will accept any amount of shares tendered. The fact that they are proceeding with an unchanged price kind of indicates that the risk of termination is diminished.
TMK has also released Q1 results showing lackluster performance due to COVID-19 and turmoil in oil&gas markets.
– Russian pipe market decreased 11% YoY and 7% QoQ due to lower large diameter pipe shipments and weak seasonal demand. TMK’s Russian division revenue was down 10% YoY.
– European market was impacted strongly as well due to unstable economic environment and continued pressure on prices. TMK’s European division revenue decreased 38% due to lower demand from key pipe-consuming industries reflecting a drop in activity, pressure on prices, as well as a negative foreign currency translation effect.
– Q2 outlook is even worse as demand continues to be pressured.
So overall, the timing for this offer is definitely interesting. It seems that the management is really focused on the long term here. CEO states: “However, we are confident that thanks to the improved balance sheet, our strong position in the major markets and our investment in R&D, TMK is well-positioned for recovery of its financials in a longer-term perspective.”
https://www.tmk-group.com/media_en/texts/410/1_Voluntary_Tender_Offer_made_by_VTZ.pdf
https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/TMKS/14548840.html
Tender Offer closed with all tendered shares accepted. Cash for shares will be transferred by mid August. 12.5% free-float remains.
https://www.tmk-group.com/PressReleases/show/1157
Arbitrage with currency hedge resulted in 9.5% return over 4 months. Arbitrage without the hedge delivered far lower returns (only +4%) due to depreciation of Russian ruble against the US dollar during the holding period.