Corning Natural Gas Holding (CNIG) – Merger Arbitrage – 5% Upside

Current Price: $23.52

Offer price: $24.75

Upside: 5%

Expected closing: late 2021/early 2022.

This idea was shared by Justin.

 

Corning Natural Gas Holding (CNIG) is one of the smallest natural gas and electric utility among publicly listed peers. On the 12th of January,  a definitive merger agreement was signed with Argo Infrastructure Partners (Argo), a private investment firm with a focus on electric power and utility industry, at an enterprise value of c. $150 million. Consideration stands at $24.75/share in cash. A 45-day “go-shop” period has already expired. Conditions include consent from 2/3rds of outstanding shares + the majority of preferred stock voting as a single class – ownership by insiders and activists suggest that shareholder approval should pass easily. Besides that, consents from the New York Public Service Commission and from the Pennsylvania Public Utility Commission as well as antitrust will be required. CNIG’s shareholder meeting is set for the 27th of May. The transaction is expected to close in late 2021 or early 2022.

Successful closure of this transaction seems very likely and the remaining 5% spread can most likely be explained by a relatively prolonged timeline.

 

Positive points of this transaction

• Regulatory consents should not be a hurdle given the size of this deal.
• Insiders hold 32% of common shares outstanding and 33.5% of preferred shares. Additionally, two major institutional investors Gabelli fund (activist) and Zucker Martial Trust own 17.1% and 11.3% of commons shares + 13% and 8% of preferred shares respectively. So far, no shareholders have voiced any opposition. Taking this into account, I view shareholder approval as very likely.
• The buyer seems credible and financing should not be an issue here. Argo is a private high-quality regulated and contracted infrastructure investor focusing on larger institutional clients. It currently manages over $4.6 billion in AUM ($2.7 billion in 2019). Capital is deployed across 11 assets and businesses in North America. Assets include four contracted power generation facilities, three utilities serving over 600k customers, two electric transmission systems, and one energy storage network. Overall, CNIG seems to fit well into Argo’s portfolio:

Our team’s decades of experience managing gas and electric utility investments, combined with our access to long-term capital, places us in an ideal position to support Corning’s ongoing infrastructure investment program and management’s efforts in achieving its customer service goals.

• The offer comes at a slightly opportunistic timing after CNIG’s recent request from regulators to allow raising their average customer bills by 10.9% (apparently, it has been 3 years since the last rate increase). This would result in a proportionate increase in the company’s revenues. CNIG explained that higher charges are necessary to cover increased depreciation expenses and other inflationary costs.
• CNIG CEO has a respectable track record and has managed to turn around the company since 2006 when he joined the board.
• The acquisition comes at 14.3x FY20 EBITDA multiple, which is rather in line with the peer average (albeit the peers are much larger companies). Given CNIG’s substantial lack of scale, material cost synergies can be expected after integration with other Argo’s businesses. So Argo is clearly not overpaying for the business. At the same time shareholders seem to be getting decent valuation relative to peers – potentially even a small control premium.

 

Risks

• The highest bidder withdrew after due diligence and the other two interested parties did not proceed to the due dilligence stage. Argo showed interest in CNIG since mid-2019 with a proposal at 15x estimated FY19 EBITDA. Eventually, 3 other suitors appeared. Two of them withdrew their intentions very quickly and throughout 2020 Argo continued a bidding war with the remaining potential suitor (Party A). When party A finally outbid Argo’s $26/share offer with their $28/share proposal, Argo decided to withdraw from the process. In September, CNIG entered into the due diligence agreement with Party A, however, after a few weeks, the buyer declined to proceed any further. After that, in October’20, Argo returned with a current $24.75/share offer.
• Downside to pre-announcement (12th Jan, $16/share) price is 34%. However, since then it was revealed that a number of other suitors have also expressed interest in the company at even higher prices ($26/share) – thus the eventual downside in case of merger termination could be lower.

 

Corning Natural Gas Holding

CNIG is a holding company of three utility firms: Corning Natural Gas Corporation (Corning Gas), Pike County Light & Power Company (Pike), and Leatherstocking Pipeline Company. Corning Gas provides gas on a commodity and transportation basis to its customers in the Southern Tier of New York State. Pike provides electricity and natural gas service in Pike County, Pennsylvania. Leatherstocking Gas provides natural gas service to customers in northeast Pennsylvania.

More background on CNIG can be found here.