Ecolab (ECL) – Split-off – $2100 Upside

Current Price –$194.12

Offer Price – $215.69

Upside – 11% or $2100 for Odd Lot holders

Expiration date – 2nd of June, 2020

SEC Filling

 

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.

60 COMMENTS

  1. dt

    For hedged trades quite a big risk here is that APY stock recovers during May (if there is oil industry recovery) and exchange ratio will be significantly below 24. So dynamic hedging might be required or position needs to be opened after/during valuation dates when there is less uncertainty.

  2. slncstl

    Can you participate in odd lot split-offs with different accounts under the same name?

    1. nuggy5

      I’ve heard you get pro-rated and brokers get upset because you have to have lied when they ask if you hold anywhere else. Not sure if it can be a legal issue.

  3. hedgehog61

    I would recommend half hedge if you can borrow until then. That way at worst you are likely to lock in some return without the worry of the ratio dropping significantly below 24. Also, as suggested, it is either better to wait closer to deal completion to enter the trade or buy ECL when the market has a down day. Other strategy would be to sell some at the money June APY options. A 99 lot will be approximately 2400 shares of APY so maybe sell 20 and take risk on the rest. June expiration will assure that you likely will not get early exercised into an unborrowable short. jUNE 10 CALLS went out .95 bid on Friday and you might be able to sell them for $1 or more which would be 11 in the stock if you get assigned and offer downside protection of $1 if you dont.

    1. dt

      Last i looked options were very illiquid with very wide bid/ask spreads.

  4. YHC

    I think just trade lesser amount if one is not that confident. Hedging often produce quite undesirable results at the most crucial times.

    1. nuggy5

      If you buy today and the exchange ratio was calculated off of today’s prices you’d still get 11% “bonus” for the transaction. Even off of yesterday’s exchange ratio of 24.50 you’d get about the same.

  5. Terence

    Arb upside down to 6.6%, due to upper limit in effect based on past 3 day prices of ECL and APY. Although APY is supposed to be more volatile, this time the upper limit is due to ECL jumping 5% yesterday. Prices/ratios can change dramatically in a few days.

    Links to the daily exchange ratio filing, and the split-off news release:
    http://www.envisionreports.com/championxexchange/2020/championxexchangemay18/index.html?voting=true
    https://finance.yahoo.com/news/ecolab-launches-split-off-exchange-103000572.html

  6. likquidfied

    When should I tender and when will APY shares show up in my brokerage account?

    1. dt

      You need to tender before your broker deadline. For IB it is usually noon on the day of offer expiration, however other brokers might have different deadlines.

      It usually takes around a week since the expiration to receive new shares in the split-off.

      1. likquidfied

        So if I tender 99 shares of ECL today, I won’t receive my APY shares until June 10th ish? And if I don’t hedge by shorting APY stock until june 10th, i’m exposed to the market fluctuation of APY price until June 10th?

        1. dt

          Correct – based on the timelines of previous split-offs.

  7. Terence

    Offer deadline is June 3, 12:01am, which is really end of day June 2. Please take note of this unusual deadline.

    1. dt

      Thanks for pointing this out.

      IB deadline for submitting allocations is “Election period expires: Jun 02, 2020 13:00 EDT”

  8. AntB

    Hi, thank you for the write-up.

    For a hedged position – IB still has about 600k shares available at 2.63%.
    Is this number high enough to avoid a buy-in? What kind of buy-ins used to happen in these split off transactions?

    Also is it already known when the new shares will hit the account?

    Thank you!

  9. ilya

    Hi
    Has anyone tried to short CFDs instead of shares? As far as I understand there is no forced buy risk for CFDs. Are there any downsides?

    1. nostradamus

      As far as I know CFD’s are subject to forced buy-ins in the same way shares are.

  10. Benjamin Perley

    I can’t imagine there being a free lunch on the CFD. Unless they’re a bookie, they’re going to have to be able to short it themselves in order to position you. No CFDs for us citizens, so please look it up and let us know :)

  11. hedgehog61

    To look back on the option strategy I proposed on May 9. Buy 99 shares ECL 197.76, closing price on May 8 and sell 20 APY June 10 calls on the bid for .95.

    Could have sold the 99 on Friday at the close at $212.58 making $1,467.18 on the long shares. Calls went out .60 at .70 so could have closed out on the offer at .70 making 25 cents on 20 contracts or $500 for a grand total of $1,967.18

    Alternatively if you tender your 99 shares you will effectively be long 2,442 APY at $8.01 (99*197.76/2,442) and short the 20 calls at .95 cost. Stock will not be delivered until at least Friday the 5th or Monday the 8th so still risk in this trade if stock collapses. However, if you put this on at time of writing, the Cost of APY is really 8.01 minus the 1900 of option premium ($0.77) or $7.23 if stock below $10 at expiration and options go out worthless or really kill it if you get assigned. Either way, unless APY implodes, this was probably the best way to play the trade.

  12. hedgehog61

    I forgot to mention this is the trade that I did and am tendering the ECL and holding the options until stock is delivered. May buy the 7.5 strike puts for $0.55 to protect the downside but will likely just hold until stock is delivered and make a decision at that time. I do believe that there will be several million “2,442 lots” for sale on delivery day and expect the stock to take a hit as stock hits odd lot accounts.

  13. Nathan

    DT – can you confirm it is still safe to purchase this on Monday with intention to tender by 13:00 EDT Tuesday? Was confused re T+3 settlement whether you need to have trade settled before you can tender? Also do you have any idea how quickly Schwab might generate the tender docs?

    1. dt

      I am not able to confirm this – you should check this with your broker directly. Due to guaranteed delivery clause, the T+3 requirement doe not apply for this tender (as was also the case for other split-offs). But your broker might have different rules/deadlines regarding this.

    2. ChrisM

      I checked with Schwab, and they told me I can buy shares of ECL today (Monday, 6/1) and still exchange my shares. I’m going to buy shares today.

  14. Nathan

    Schwab Corp actions department just told me opposite, saying you cannot buy today and tender by deadline.

  15. likquidfied

    “Following the closing of the merger, Apergy plans to change the name of the combined company to ChampionX Corporation and to change its ticker symbol to CHX.”

    What happens to the short APY calls when the symbol changes from APY to CHX?

    1. dt

      You short APY position will be changed into short CHX position.

  16. fishwithwings

    Does anyone know why these kinds of trades do best when left unhedged?

    1. dt

      Most likely due to selling pressure from all the arbitrageurs.

      1. Terence

        MCK/CHNG, 2 months ago: CHNG dropped 50% from pre to post split off (a windfall for those who hedged). This can still happen here also, or it may also double from now!

  17. jf

    https://investor.ecolab.com/news/news-details/2020/Ecolab-Announces-Preliminary-Results-of-Split-off-Exchange-Offer-Intends-to-Accept-Tendered-Shares-and-Expects-Closing-of-the-Apergy-Transaction-Today/default.aspx

    “Based on the total number of shares of Ecolab common stock reported to be tendered and not properly withdrawn prior to the expiration of the exchange offer, including shares tendered pursuant to guaranteed delivery procedures, the exchange offer was oversubscribed by approximately 93,095,858 shares, resulting in a preliminary proration factor of approximately 4.67 percent.”

    ——-

    Can this, in any way, affect the odd-lot provision?

    1. Random Deals

      It appears that the fear of ECL dropping the odd-lot preference did not come to pass. In the past, when a company dropped the odd-lot preference, how late did they do it? In the tender offer of BLBD (not a reverse-Morris trust exchange) expiring on 10/15/2018, the odd-lot preference was eliminated 5 trading days before expiration. That should have given arbitragers time to withdraw if desired. Has any company eliminated the preference closer to the expiration date?

      It appears that the expiration of an offer is the deadline for such modification. For example, the ECL terms state, “Ecolab expressly reserves the right, in its sole discretion, to amend the terms of this Exchange Offer in any respect prior to the expiration of this Exchange Offer.” https://www.sec.gov/Archives/edgar/data/1723089/000119312520129726/d916013d424b3.htm

  18. dt

    Proration of 4.67% is higher than I modeled (i.e. I expected more shares and more odd-lots to participate in the offer). By my count only c. 4000 odd-lot account participated, which is far smaller than the previous split-offs. I am guessing the reason for that is the reduced upside by the time the offer expired – i.e. due to market volatility most investors were waiting for the last day to jump on board of this trade and by that time the upside was only few percentage points. This can also be seen from more than half of shares tendered through notice of guaranteed delivery. (vs. c 1/3 in MCK/CHNG split-off).

    1. fishwithwings

      Unfortunately, I was one of them. Closed my position when the spread narrowed.

  19. lagrandebelleza

    Why are you saying last minute upside was just a few percentage points when in fact the spread was still around 10%?

    1. dt

      You are right – I was referring to the last week when the upside was at/under 5%.

      On the last few days it widened again:
      Prices on Monday close: ECL $209.05, APY $9.15, Upside=8%
      Prices at noon Tuesday (last time to tender at IB) ECL $218.8, APY $9.76, Upside=10%

      1. rick lewis

        For anyone that is going to be getting CHX shares next week (Tuesday is what my broker told me to expect them)…….The June calls can be sold…..The 15’s are bidding 5c……which is what looks like free money…two weeks……longway away from current price

  20. Benjamin Perley

    Weird margin stuff at IB with buying power coming and going based on the ticker change and CHX up. I’d keep an eye on it an don’t try to cut it too close.

  21. blades

    I just got notice from IB of inability to borrow CHX shares and the closing out of my short position in the morning unless shares can be located. Anyone else? Maybe I need to move to options? This is an unpleasant surprise. I’m hoping it’s just confusion from the ticker change.

  22. g4734g

    I got in Friday and Monday (no problem tendering with fido on Mon purchases) and was mostly hedged. Hindsight 20/20 but a strong argument can be made that because APY was trading strictly as a derivative of ECL, it’s “real” value was not being represented in its price action, especially at a time when its peer group was staging a massive recovery. And of course, that is exactly what happened once the “right to tender” expired. Glad to have made a handsome profit, but kicking myself for not seeing what should have been somewhat obvious, and not taking at least a fair percentage of the hedge off.

  23. ChrisM

    Interactive Brokers is forcing me to close out my CHX/APY short. Is there anything that I can do or am I screwed?

    1. nmeile87

      It’s clearly an artefact of changing ticker symbols. The Short stock availability search returns plenty of availability for “APY.OLD” and none for CHX. While this seems like an unfortunate oversight on IB side, I suspect that those with short positions in CHX may be force-bought at 9 am ET.
      Very unfortunate situation, have already reached out to IB support after I received the message on non-availability of shares to borrow. No response as of yet.

      1. nmeile87

        As of 6.30 ET there is 3’400’000 shares of APY.OLD available for borrow and 0 of CHX

        1. Writser

          Interesting find. CHX does have another ISIN than APY. I’m not 100% whether this is just a simple administrative problem at IB or whether the ticker and ISIN change is really messing up the securities lending in some way or another. But it could very well be the first. Whether that’s a consolidation if IB buys back your shares in the market today is another question ..

          Support is not really being helpful. I guess today at market open we’ll see if shares have disappeared from all these accounts or whether IB has secured / fixed the borrow.

  24. Michael Lax

    I don’t see a notice from IB, though I do see that no shares appear to be available for shorting, not sure what will happen…

  25. paul.debrouwer@protonmail.com

    I don’t understand the ISIN issue but I noticed the short CHX CFD’s did not get the same close out notice!

  26. blades

    The good news: IB has substituted CHX for APY so my short position is in place. The bad news: CHX is on a tear. Just hoping I can ride this out.

  27. fishwithwings

    Am I dreaming. A unhedged position would have resulted in a 50% profit??

  28. Terence

    Yes, 50% profit, fishwithwings. “Similar” to the 50% loss with MCK-CHNG. “Only” difference is CHNG was received at the worst of the bear market, while CHX received in this raging bull market.”

    DT, thanks for the ECL writeup. You mentioned (correctly I think) a higher risk of odd lot cancellation due to expected high % of odd lots over total shares to be exchanged. “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.”

    It turns out only 400k shares of ECL odd lot shares were submitted. I’m guessing odd looters got scared of the “risky” APY/CHX, while they feel confident about the “safer” CHNG. Or, they just became more risk adverse after the CHNG debacle, remembering only the last deal. No …. I still think the majority is correct about preferring CHNG, but “man plans, and God laughs”. Also, the better saying is “man plans (and should do so), but God decides.”

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