CRA International (CRAI) – Odd Lot Tender Offer – $600 Upside

Current Price: $70

Offer Price: $66.25 - $76.00

Upside: $600 (odd-lot)

Expiration Date: 5th of April 2021

Offer document

 

On the 8th of March, Consulting services firm CRA International announced a tender offer to repurchase $25m (4.5%) of shares at a price of $66.25 - $76.00/share. Shareholders owning less than 100 will be exempt from proration. The potential upside for odd-lots is around $600 (if priced at the upper limit) vs $400 downside (if priced at the lower limit).

A quick review of this case offers limited arguments in favor of the tender getting undersubscribed or priced at the upper limit. The size of this tender is very small and oversubscription is likely. Anything above odd-lot position is not recommended. Odd lot positions participating in the tender might result in losses as well if the final tender price ends up below the current market price. A couple of additional points are outlined below:

Positive points:

  • Management owns 5.2% and will not participate in the tender.
  • Following this tender offer, CRAI will have $27m left for future repurchases from its current buyback program. During FY20 (ending Jan'21) the company has repurchased $13.4m of its shares at an average price of $47/share.
  • The offer will be funded with a mix of debt and cash on hand. As of Jan'21 the company had $46m cash on hand and a $120m availability under credit facility.
  • The pre-announcement price stands at $66.16/share. CRAI stock has been recently lifted by the positive annual results announcement (ending in Jan'21), which noted improved revenue guidance as well as continued improvement in other KPIs due to increased demand for the company's services. FY20 revenue grew 12.6% (vs 8% YoY), non-GAAP EBITDA was up 15% and net income increased 18% (vs -8% YoY).
  • Shareholders will also receive a cash dividend of $0.26/share payable on the 26th of March with the record date being the 16th of March.
  • Downside for odd-lot positions is limited.

Less positive points:

  • Management was selling a decent amount of shares at a much lower price not that long ago. In October, they sold around 32k shares at around $41/share price for a total of $1.3m (CEO sold $0.715m).
  • 2021 guidance shows a slow down in growth compared to FY2020 - management expects this year's revenues to grow 6% and non-GAAP EBITDA by 9.5%-10.2%, materially below the recent year's numbers.
  • The offer values CRAI at 21x - 24x FY20 P/E, which even with consistent growth and a strong balance sheet (no debt), doesn't seem low for a consulting company with expected revenue growth of 6% this year.

 

 

CRAI

CRA International provides economic, financial, and management consulting services. It offers consulting services in these areas:

  • litigation, regulatory, and financial consulting;
  • management consulting.

Shareholders:

8 COMMENTS

  1. nuggy5

    Any thoughts on where the final purchase price will be? I’m trying to decide if I should tender or just sell and take a (small) gain.

  2. rc99ar

    The tender was open until 13:00 EST and I had my offer taken out at 12:46 for $75.90. I would think that’s a positive sign that those tendering will get $76. Stock is trading above $76 atm. Is this an atypical result for odd-lots?

  3. Terence

    Tender oversubscribed by 25% at $74, below $76 about which the stock traded mostly at yesterday (the last day to tender with guaranteed delivery). This is certainly atypical, but did happen also in other tenders lately. One possible reason is big sellers cannot unload at $76 given the illiquidity.

    rc99ar, I think the price trading anywhere within or near the range (including at the upper limit) is common.

    https://finance.yahoo.com/news/charles-river-associates-cra-announces-123000606.html

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  4. W51W52

    People who submit to the tender offer early in the period locked in a price that is lower than $76, and not everybody checks the current price and change their choice upwards accordingly. This is especially given the size of this offering because primary participants are retail investors.

  5. Terence

    How does the size of the tender contribute to the low pricing? How do you know primary participants are retail? Thanks for your input. (Tender size is about 5% of total shares, and institutional investors + insiders = 86+5%=91% of total shares, per yahoo finance if correct.)

  6. W51W52

    So CRAI is a $560 million market cap company, so you’d say that’s small cap / microcap. The stated assumption in the tender offer document is that the top institutional owners will not tender their shares. I haven’t seen that disclosure too often for previous tenders, so that gives me the indication that perhaps the size of the company and the size of the tender itself are not “interesting” enough for most institutional holders (i.e. incremental gains on participation do not move the PnL needle that much). So, if institutions are not likely participants, then that only leaves retail.

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