Current Price: $8.40
Offer Price: $9.75
Expiration date: 13th of April
This idea was shared by Tom.
A quick and slightly speculative idea.
Major electricity & gas utility company Enel has launched a tender offer for its LATAM subsidiary Enel America’s (market cap = US$12.5bn). The offer is for 10% of outstanding shares, or 40% of minority shares excluding parent’s stake. ENIA’s common shares are trading on the Santiago (Chile) stock exchange and ADS shares are listed on NYSE. Consideration stands at CH$7000 per ADS, payable in USD. At current exchange rates, this is equal to US$9.75/share per ADS vs share price of US$8.40/share (potential 16% spread). All major conditions of the offer have already been satisfied. Withholding taxes should not apply to non-Chilean residents.
Expecting 60% proration and assuming a conservative scenario of $7.30/share after-tender price, the situation offers 4.4% upside opportunity with high IRR. Other scenarios are indicated in the table below. Assuming that more than 40% of the tendered shares end up accepted, the risk/reward ratio looks positively skewed.
The parent owns 75% of ENIA, so the offer is effectively carried out for 40% of the remaining free-float, which would normally indicate potentially low/non-existent proration. However, in this case I expect the participation to be somewhat elevated as the offer was launched concurrently with the recent ENIA’s merger as an alternative to cash out dissenting shareholders. Last year, Enel (the parent) announced divestment of its renewable energy business in LATAM and intention to merge it with ENIA in exchange for ENIA’s shares. Certain minority shareholders (ownership % unknown) expressed concerns that the originally intended cashout price of CH$109.79/share (vs CH$140/share in the current tender) was insufficient. Subsequently, on the 17th of December, the current tender offer was announced and replaced the previous cashout option for minority shareholders. The merger between ENIA and Enel’s renewable energy business closed on the 1st of April’21.
Under these circumstances, if all minority shareholders submit shares in the tender, the proration will be 40%. I think it’s fair to expect the participation to end up lower as it’s likely that a certain amount of shareholders will either forget to submit their shares for the tender or will decide to keep their shares for the long-term. Overall, 60% proration seems as a fair guess-estimate for this case.
Given a meaningful outstanding spread to the offer price, the market clearly anticipates ENIA share price to tumble after the offer expires. The likely floor here is $7.30/share, which was a closing price before the ENIA merger announcement (August 26th, 2020). I don’t think ENIA will fall below these levels, and there is a decent chance that shares will trade materially above these levels. $7.30/share price in August was depressed due to COVID-19 impact on ENIA (lower demand and FX losses). Meanwhile, Q4 results, released on the 25th of Feb, were much more positive and showed improvement/recovery over the previous quarters. Overall, ENIA is a stable, government-regulated utility business and should eventually recover to pre-COVID levels – 2019 share price range was $8-$10+/share. Besides that, at the current price ($8.5/share), ENIA trades at 5.6x EV/EBITDA (non-adjusted) multiple, which is in line with its historical levels, and peer valuation.