Current Price –$194.12
Offer Price – $215.69
Upside – 11% or $2100 for Odd Lot holders
Expiration date – 2nd of June, 2020
Split-off transaction of which a few have already been posted on the site (most recent MCK/CHNG). 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. So far all of these have worked out as expected, however this one has somewhat higher risk of odd-lot provision being amended.
In short, every $100 of Ecolab (ECL) stock accepted in the tender will be converted into $111.11 of Apergy (APY) stock subject to the upper limit of 24.6667 shares of APY per ECL share. Tender will expire on the 3rd of June 2020 and the exact exchange ratio will be determined couple days before that. Odd lot tenders will be accepted on priority basis. At the moment there is APY borrow (at 5% rate on IB) to hedge the position.
Important points / risks to consider (very similar to other split-offs):
- The offer will be heavily oversubscribed. As only 1.7% of ECL shares will be exchanged in the split-off and upside is quite significant, the offer will surely be oversubscribed. In the recent MCK/CHNG transaction half of all outstanding shares participated in the tender. If ECL shareholders tender in similar fashion, proration will probably be around 3%-4% – only very tiny part of participating shares will be accepted in the tender.
- Odd-lots are exempt from proration. Holders of less than 100 shares will be exempt from proration.
- Risk of Odd-lot provision cancellation. This provision has never been cancelled in split-off transactions so far (at least the ones I tracked). However, in this case I am estimating that close to one quarter of all shares accepted in the tender might be odd-lots. In MCK/CHNG transaction c.1.2m odd lot shares participated in the tender. This figure is likely to be similar in this case as well, suggesting that odd-lots will account for 1.2m shares out of the total 5m shares to be accepted in the tender. If the ratio ends up this high, the provision might be amended.
- Tight borrow. APY borrow might disappear and is likely to get even more expensive. Some hedged positions might be forced to buy in (this has happened in couple previous split-offs). APY sharecount will increase almost 3x as a result of this transaction (old shareholders 38% and new shareholders 62%) and eventually arbitrageurs will run out of APY shares to borrow.
- Hedge vs no-hedge. APY trades significantly below pre-covid levels ($25/share, vs current $8/share). Apergy provides services for upstream O&G and has sold-off with the rest of the industry. Unhedged trade would make sense (and likely would end up more profitably) if the sentiment in O&G industry turns more positive till June. Also worth noting that ECL trades close to all time highs.
- Timing. Entering this trade closer to expiration might pay-off better. However, part or all of the upside might be gone till then or there might be no APY borrow available (case by case situation, so hard to determine in advance).
- Upper limit. Transaction is subject to the upper limit of 24.6667 APY shares per share of ECL. At current prices the exchange ratio (at 24.2) is slightly below the upper limit. If the spread widens (i.e. ECL gets more expensive and/or APY gets cheaper) till/during valuation dates, the final pay-off might be less than 11% or get eliminated altogether.
- Valuation dates. Final exchange ratio will be determined based on the VWAPs on the 27th-29th of May, 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 the upper limit on the exchange ratio, upside might be reduced or eliminated till then.
- Both companies recently reported Q1’20 results, so no further financial reporting is currently scheduled till the tender expiration.
- Transaction in O&G service industry. Both Apergy and Ecolab’s business that is being merged into APY provide services and equipment for upstream O&G companies (presentation here). The whole energy sector is currently in a bit of a turmoil due to drop/volatility in oil prices, however I do not think industry trends will affect the transaction at this stage – current tender offer is the very last step and companies appear to be proceeding forward.