DuPont de Nemours (DD) – Split-Off – $400 Upside

Current Price: $77.88

Offer Price: $81.89

Upside: $400 (for 99 shares)

Expiration Date: 29th January

Prospectus

 

This is a split-off transaction of which quite a few (16) have already been posted on the site (most recent ones are ECL/APY and MCK/CHNG). I recommend reading through those and especially checking our in-depth Analysis of Split-off Trading Strategies to examine share price behavior, risks, and strategies involved in this kind of transaction. So far all of these have worked out as expected, however, certain risks still remain.

DuPont de Nemours (DD) is selling its Nutrition & Biosciences (N&B) business to International Flavours & Fragrances (IFF). As part of the transaction, N&B will be split-off and merged into a subsidiary of IFF. DD shareholders have the option to participate in the tender and exchange their DD shares for IFF shares.

In short, every $100 of DuPont stock accepted in the tender will be converted into $107.53 of International Flavours & Fragrances (IFF) stock subject to the upper limit of 0.7180 shares of IFF per DD share. The upper limit is currently in effect. Tender offer will expire on the 29th of Jan 2021 and the exact exchange ratio will be determined on the 27th Jan. Odd lot tenders (<100 shares) will be accepted on a priority basis and won't get prorated. It seems that due to a rather large amount of exchangeable shares the risk of odd-lot provision cancellation is somewhat lower than in the previous tenders.

At the moment the borrow on IB is unavailable, however, unhedged play is also an option and, in fact, it has resulted in higher returns for 12 out of 16 of the previous split-offs (although it still contains serious risks, see more below). The upcoming 3 weeks might provide better opportunities to enter this trade.

Important points/risks to consider (similar to other split-offs):

  • Upper limit. The transaction is subject to the upper limit of 0.7180 IFF shares per share of DD. At current prices the exchange ratio is already at the upper limit. If the spread widens (i.e. IFF gets more expensive and/or DD gets cheaper) till/during valuation dates, the final pay-off might be lower than indicated above or get eliminated altogether.
  • Oversubscription. 26% of DD shares could be exchanged in the tender, which is more relative to previous split-offs (around 5%). Moreover, the company seems quite confident that many DD shareholders will not participate and the offer will end up undersubscribed: "DuPont currently expects that the number of shares of DuPont common stock tendered in the exchange offer will result in fewer than all of the shares of N&B common stock being subscribed for. [...] While proration is possible, DuPont does not expect proration to occur". Nonetheless, in nearly all of the previous split-offs have been heavily oversubscribed (10x-20x). Thus despite a larger portion of shares that can be accepted in the offer, the risk of proration remains.
  • Odd-lots are exempt from proration. Holders of less than 100 shares will be exempt from proration.
  • Tight borrow. Availability of borrow is likely to stay limited in the upcoming weeks as IFF share count will increase over 2x as a result of this transaction (45% old shareholders and 55% new shareholders who converted from DD). However, borrow might still reappear from time to time. It is important to keep in mind that even if one manages to open a hedged position, borrow fees might increase further and there is also a risk of forced buy-in (this has happened in few previous split-offs).
  • Hedge vs no-hedge. Our analysis shows that on average unhedged split-off arbitrage results in higher returns - 12 out of 16 transactions had higher profits with unhedged vs hedged positions. However, with only 5% spread at the moment, there is a substantial risk that unhedged trades will result in a loss due to volatility in IFF share price.
  • Valuation dates. The final exchange ratio will be determined based on the VWAPs of a few days before the final ratio announcement (27th Jan), 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, the upside might be reduced or eliminated till then.
  • Timing of the position opening. Our analysis of previous split-offs shows, that on average opening the position earlier before the final exchange ratio is known results in higher arbitrage profitability. However, as stated above, upcoming weeks might still provide better opportunities to initiate the position (i.e. spread might widen).
  • Risk of Odd-lot provision cancellation. This provision has never been canceled in split-off transactions so far. The maximum amount of odd-lot shares participating in a split-off was close to 2m vs 200m of DD shares that can potentially be accepted in this offer. However, at least theoretically, the risk of odd-lot cancellation still remains.

 

DuPont

The company is a multi-industry specialty solutions company. It is involved in electronics & imaging, transportation & industrial, nutrition & biosciences (N&B), safety & construction businesses. The company saw rather a small impact from COVID - in the 9 months of 2020 net sales fell -7% YoY and operating EBITDA -12% YoY.

The merger between N&B (the business that DD is spinning-off) and IFF has been announced back in Dec'19 and the current split-off is the last step to it:

 

IFF

The company produces flavor, fragrance, and cosmetic products (128k products in 200 countries). IFF has also been quite resilient to the pandemic - in the 9 months of 2020 net sales fell by 1% YoY, while EPS ex. amortization decreased by -8% YoY.

10 COMMENTS

  1. Zulu Investor

    Thanks for this idea.

    Considering there is limited borrowing of shares, my two questions to you are:

    1) Would one be able to make a ‘synthetic short’ by buying a month out put option? Not sure if puts are cheap enough for this and I do not have much experience in derivatives.

    2) Assuming many of us may make this trade unhedged, or have some sort of dynamic hedging approach (for example hedge 50% of total position in DD or short 35.5 shares of IFF ), could you provide some color on the 4 out of the 16 unhedged positions that resulted in a loss? Were they in a bear market climate? Was it company specific related? I think that might be helpful in understanding how one might approach the hedging aspect (if there is any available to hedge against.)

  2. charlies_almanac

    This is interesting since they don’t expect to get fully filled. It means that the remaining n&b stock gets spun off to non tendering holders. I wonder do IFF try to clean that up? It’s kind of unusual situation. Probably won’t have spin off dumping (because the holders are generally people who probably want to hold it, else they should tender, but index trackers will not render and will probably have to sell. Could be a nice buy if there is a good chance iff clean up the rest of it…
    Anyone ever see something like this before? Guess it would need to be a non fully subscribed split off to be like this really..

  3. Mike

    does this still make sense to do with DD’s run up? when does it have to be done by? thanks!

  4. fishwithwings

    Do you recommend selling the stock since it is up or going through with the exchange unhedged?

  5. Terence

    DD $83, IFF $118.50 x .718 = 84.70, 2.1% spread. For me, too low for the risk.
    If you bought at $78 at the time of the write-up, and sell now, it’s a 6.5% gain. Thanks, DT!
    Huge run-up in DD and IFF prices since deal was finalized after market close on 12-31-2020. Maybe due to some analysts’ upgrades.
    Since then, DD/IFF prices up and down very closely, I don’t know why.

  6. Terence

    News of preliminary #shares submitted out today 6:30am. 2x DD shares were submitted, so proration is about 50%. DD price down 5% as of 10:53am, and IFF up 9%. I assume this is the result of arb players having shorted too much IFF shares before the deadline, so that they have to buy back IFF shares today, and sell more DD shares they did not expect to get back.

    Exchange ratio is final at .718, the max limit, which is expected. The spread has remained around only 2% last week before the deadline expired on Friday. I guess the big players still felt the 2% was still worthy enough to arb, resulting in the 2x shares submitted for exchange. In most of the previous exchange offers, the spread was bigger close to the deadline, and shares over-tendered were much more.

    Interesting that the small expected 2% arb gain last week, turned into a 10% today, almost entirely due to the 9% jump in IFF price today. If one bought at last month’s high at $87 for DD (down to $80 at month end last Friday) , you still expect to get $88 equivalent based on IFF price today. e.g. all arb players still come out ahead even if they were unlucky to buy at the high.

  7. Terence

    DD down 9%, IFF up 16% as of 2pm today! The two went up and down very closely for the entire January. After the news today, they diverge by 25%. Big congrats to whoever among us followed thru with the exchange.

  8. dt

    With new shares hitting the accounts, I am closing out DD/IFF split-off. Unhedged trade (as there was no borrow available) resulted in 17% return in a month. MA big part of this gain was due to the jump in IFF share price after exchange offer expiration.

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