Enel America’s (ENIA) – Tender Offer – 4%+ Upside

Current Price: $8.40

Offer Price: $9.75

Upside: 4%+

Expiration date: 13th of April

Offer document

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.

26 COMMENTS

    1. Tomuk

      Hey, I took the 10% number from the offer document, which was correct at the time as there were 76m outstanding shares in March. After the 1st of April, share count increased due to additional ENIA shares issued to the parent after the completion of the merger. However, this does not affect the upside sensitivity analysis presented in the table, which was calculated using the correct figures. You are correct that my 40% figure was misstated – should have been 29% – but again this does not change the upside calculations. However, worth noting that if every single shareholder participates in the tender, the proration will end up at 29% (vs. 40% I have indicated in the write-up). Thanks for spotting this.

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  1. rc99ar

    Given your range of probable outcomes isn’t naked shorting the better bet?

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    1. Terence

      Maybe a good short now? I’m not knowledgeable or experienced at all in shorting or tenders, so please correct me.

      This is what I think, which may be wrong: The tender deadline has essentially passed since the deadline is tomorrow April 13 and there is no guaranteed delivery. So the last day one can buy and tender was last Friday + 2 day settlement. Shorting last Friday ran the risk of borrowed shares being tendered and accepted at $9.75. Does shorting today still have such risk (since borrowed shares which are already settled can still be tendered tomorrow)?

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  2. Terence

    $8.77 now, up 4%+, exactly the target upside in the write-up. Max upside in the tender is 9.75 less 5c ads fee or 9.70. Worst proration is 29% per Tomuk above. So price now is equal to 9.70 x 50% proration + 7.70 price tomorrow x 50%. Up and down $1 at 50/50 chance.

    1. snowball

      If the last day to purchase and be eligible were Friday 04/09, then the Monday quote of $8.36 should be the “ex-tender-rights” price, which means this trade’s profit would be much more than we expected?
      If this were true, we could start selling short say 50% of ENIA shares and lock in gains?

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      1. dt

        Not correct. By shorting the stock before tender expiration, part of your short might end up being bought in the tender, if the shares that you borrowed get submitted to the tender. Only shorting after the actual tender expiration deadline removes that risk, as by that time the shares submitted to the tender get temporarily locked up and removed from the borrow pool.

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      2. rc99ar

        My understanding is If the owner of shares loaned out wants to tender them, the broker will just buy shares in the open market and tender those and the broker becomes the owner of the shares on loan. The broker can make you return shares on loan, but you’re buying them in on the open market, I don’t think you can be forced into buying into the tender. Am I mistaken?

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      3. dt

        I can not advise of how it works exactly behind the scenes. However, from my limited experience, when I have tried to short shares before tender expiration in some cases I had part of them bought in during the tender and in some cases not. So I am guessing this depended on whether the owner of loaned shares submitted these to tender or not.

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      4. snowball

        @rc99ar @dt
        It will be very valuable for us to figure out how this exactly work, in case we encounter similar situations in the future:
        (1) If the broker buys shares in the open market on 4/13 to return them to the owner, is it too late for those shares to be eligible for the tender anyway?
        (2) Will the short seller be asked to pay the tender price to the owner (in case the owner elects to tender), based on the proration results?
        (3) I can see that there is a CFD (contract for difference) available for ENIA. If we short the CFD contract on 4/13 , our P/L will be based on open market prices, irrespective of tender results. But then the sponsor of CFD will be exposed to the tender risk (that the shares they borrow to hedge are tendered by the owner) ?
        Since the CFD quotes did not deviate from underlying share prices on 04/13, at least for Interactive Brokers (IB), can we assume that IB (which is sufficiently smart) did not think they were exposed to such risks?

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      5. dt

        (1) I did not understand the situation you described.
        (2) Yes, based on my understanding.
        (3) While I am not sure how exactly the tenders are handled in case of CFDs, I am pretty confident there should be no risk free arbitrage. E.g. IB notes (https://www.interactivebrokers.co.uk/en/index.php?f=deliveryExerciseActions&p=corpActionCFDs): “In cases where the broker is unable, in its sole judgment, to determine a fair and transparent handling of a corporate action, the broker will terminate the CFD prior to the ex date for the event. The broker will announce terminations at the earliest opportunity. Position closeouts will be valued at the closing price on the termination date.”

      6. rc99ar

        For me this worked out as dt warned. I had 37.7% of my short position forced to tender at the tender price. The short put on after the corporate action deadline was not affected. I may call IB and ask if there was a way I could avoid (or participate) in a forced tender of a short position. Feels like I got freerolled.

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      7. dt

        Thanks for experimenting and sharing the results on this.

  3. AG

    Does anybody know if the ADS can be tendered if they are bought on April 13th, or do the trades need to be settled by then to be able to tender the ADS/shares?

    1. Terence

      Need shares to be settled, since no guaranteed delivery provision to tender shares. Brian’s answer above confirms this.

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  4. Michael Lax

    when will tender results be published, I don’t see any press release yet on Yahoo Finance, or on company website, though website was hard to navigate, as I needed to use Google Translate since it is in Spanish?

  5. rc99ar

    @snowball. I took a short position on the 8th which appears to be entirely locked up for a corporate action atm. I took a second position on the 13th after 1pm which is trading freely. I’ll post the outcome. Your idea about using CFD’s is intriguing. The $7.50 options expiring April 16 were trading around .10 on the 8th. The bid has since disappeared.

  6. Terence

    DT, the company tender deadline here was April 13 at 5pm. It is safe to begin shorting in the aftermarket at 5:01pm? or have to wait till next day? You said “Only shorting after the actual tender expiration deadline removes that risk”. (I asked for purposes of education, as I agree with Snowball’s comment about this for future purposes.)

    Yesterday, April 14, the first trade was the high of the day, slowly dropping and closed at about $8 from 8.53 previous close. I don’t think this happens in general with the split off tenders (the last one went up huge after the tender deadline). I imagine it does with tenders with a fixed price more often, but I don’t keep track. Anyone looked at this theory?

    1. dt

      The expiration for this ENIA tender was at 5pm so shorting after this time might work out. However, I am not sure if the borrow pool excludes shares submitted to the tender after this time. Have not tried this.

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  7. rmunchkin

    @rc99ar

    Although your short position may not have been allocated in the tender, if most shareholders tendered there will be very few remaining shares for you (and any other shorts) to borrow. I would expect the borrow rate at your clearing firm to increase significantly (100%+). Just something to keep in mind.

  8. Tomuk

    Tender offer results seem to have been released in Spanish. The proration stands 42%. The below is translated with Google:

    “The takeover bid closed with a demand for 18,171 million shares to sell Enel Américas, that is, slightly more than double what the Italian firm was willing to buy, which was 7,608 million.”

    https://www.valoraanalitik.com/2021/04/13/termina-opa-por-enel-americas-en-chile-ofrecen-mas-de-lo-esperado/

    Proration ended up lower than I expected, but this was more than compensated by higher after-tender share price.

    With 42% proration (to be purchased by the company at $9.75) and yesterday’s closing price of $8.23 for the remaining 58% of shares (this can be hedged now) results in blended price of $8.86/share or 5.5% up on the write-up price.

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    1. snowball

      English version of the official press release states that the proration ratio stands at 37.7%.

      https://www.prnewswire.com/news-releases/enel-americas-issues-statement-regarding-the-final-results-of-the-voluntary-partial-public-tender-offer-for-enel-americas-shares-and-american-depositary-shares-by-enel-spa-301270313.html

      Re the after-tender share price, I am wondering whether we are doing the victory lap too early:
      Only after the tendered but not accepted shares (about 250 million ADS equivalent) are returned to owners can we really gauge the true selling pressure. Currently, those shares are still locked up and short-sellers could not locate shares to borrow, which could explain why ENIA share price remains firm today despite the disappointing proration result.

      I am wondering when the tendered shares will be returned to brokers and then to owners?

  9. Terence

    Down to $7.22. Good value as a long term hold? Below $7.30 estimated floor in the write-up.

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