BRP Inc. (DOO.TO) – Odd Lot Tender Offer – C$1700 Upside

Current Price: C$95.47

Offer Price: C$94 - C$113

Upside: C$1700 (if priced at the upper range)

Expiration date: 23rd of July, 2021

Press release

 

Due to high withholding taxes, this idea is suitable only for Canadian residents or others who are not subject to these taxes.

On the 15th of June, BRP Inc. announced intentions to launch a substantial issuers bid (tender offer) for C$350m. Consideration stands at C$94-C$113/share and the company expects to buy c. 4% of its shares. Odd lot priority is included with C$140 downside vs C$1700 upside. Non-Canadian investors will be subject to substantial withholding taxes. In 2019, paid-up capital used to be C$4.21/share and has likely remained at similar levels at the moment. Net of withholding taxes the consideration would be C$80.6-C$96.7/share. More precise information should be included in the upcoming issuer bid circular.

As the shares are currently trading close to pre-announcement prices and close to the lower limit, odd-lot arbitrageurs have a cheap (downside capped at C$140 or -1.5%) one-month option to wait for any positive developments or improvement in BRP share price. There might also be a play with BRP July options (for U.S. listing, ticker DOOO) assuming the share price remains within the tender offer range during this time - however, options trading volume is very limited.

The offer is likely to end up oversubscribed. Two major shareholders (Beaudier group) owning 27.7% of shares will make proportionate tenders to maintain their proportionate stake in BRP. Overall, arguments in favor of the upper limit pricing seem limited and it's quite possible that the final price could be set at the lower half of the price range.

BRP Inc. has already done a similar tender in June'19 for 6%-7% of the outstanding shares at C$44-C$52/share. Beaudier Group, which owned 29% at the time and another major shareholder Bain Capital (21.3%) also tendered their shares proportionally. The offer ended up slightly prorated - 95.8% of the tendered shares were accepted at C$47.3/share. This time, however, the press release did not mention Bain Capital's (currently owns 19%) intentions, so maybe the shareholder will abstain from tendering.

As the shares are currently trading close to pre-announcement prices and close to the limit, odd-lot arbitrageurs have a cheap (downside capped at C$170) one month option to wait for any positive developments or improvement in BRP share price.

 

BRP Inc.

The company designs, develops, manufactures and distributes powersports vehicles and marine products. Portfolio of products includes Ski-Doo and Lynx snowmobiles, Sea-Doo jetskis, Can-Am on- and off-road vehicles, Alumacraft, Manitou, Quintrex, Stacer and Savage boats, Evinrude and Rotax marine propulsion systems as well as Rotax engines for karts, motorcycles and recreational aircraft.

Due to covid induced shift to all kinds of outdoors-related activities and products, BRP saw a material boost in revenues, margins and earnings. Revenue growth is expected to continue this year at 25%-30% and EPS are guided to C$7.25-C$8.00. Results for the last two quarters show that the company is on-track of achieving these targets. So in a way, current tender prices BRP at only 12x-14x forward EPS, which is very cheap if current growth rates are set to continue.

18 COMMENTS

  1. nuggy5

    If I buy the US ticker will they be eligible for a tender without withholding?

  2. dt

    The US ticker should be treated the same way as the Canadian one and the same withholding taxes will apply. That is my understanding, however, issuer bid circular will be released shortly and will clarify this.

  3. nuggy5

    I bought a share in my US IBKR account and don’t see an ability to tender for what it’s worth

  4. rc99ar

    Still not seeing an ability to tender / corporate action in IBKR. Called my other broker twice and they don’t know what to do. Looks like the instructions are on SEDAR under Notice of Guaranteed Delivery. Never had a problem with these before, anyone else have issues?

    1. rc99ar

      Got it sorted. Just needed to get the right person on the other end of the phone.

  5. Sean McMahon

    Question for US-based investors. Does anyone have experience doing these in an IRA? If so, were you successful in avoiding withholding, and which broker did you use? I hold a few Canadian dividend-payers in my IBKR account and have never had anything withheld, but haven’t tried with tenders. Thanks.

    1
  6. nuggy5

    Just got the notification in IBKR.
    “As per the Offering Document: Deemed Dividend – A Shareholder who disposes of Shares pursuant to the Offer will be deemed to receive a taxable dividend on a separate class of shares comprising the Shares so sold equal to the excess of the amount paid by BRP for the Shares, being the Purchase Price, over their paid-up capital for purposes of the Tax Act. BRP estimates that on the Expiration Date the paid-up capital per Share should not exceed $4.18 for purposes of the Tax Act. As a result, BRP expects that a Shareholder who disposes of Shares under the Offer will be deemed to receive a taxable dividend.”

    I’ll try a single share and see what my net comes out to be. I’m in a taxable account. If someone tries in a non-taxable account that would be appreciated…

  7. W51W52

    Every time there’s a Canadian tender offer, the same question pops up, so I thought it’d be good to provide a definitive answer here.

    Article XXI of the U.S. – Canada Tax Treatment, Paragraph 2 (originally written in 1980, amended in 2007):

    “…income referred to in Articles X (Dividends) and XI (Interest) derived by a trust, company, organization or other arrangement that is a resident of a Contracting State, generally exempt from income taxation in a taxable year in that State and operated exclusively to administer or provide pension, retirement or employee benefits shall be exempt from income taxation in that taxable year in the other Contracting State.”

    Furthermore, per IRS Letter 2010-0203 (https://www.irs.gov/pub/irs-wd/10-0203.pdf):

    “Certain U.S. entities that are generally exempt from taxation in a taxable year in the United States (such as IRAs) are exempt from taxation on dividend income arising in Canada in the same taxable year (Article XXI (Exempt Organizations) of the Treaty).”

    Now, specifically, Interactive Brokers follows this guidance to the letter, and all tender offers / dividends / interest in IRAs/Roth are not subject to the 15% withholding tax. Schwab, on the other hand, is a bit trickier, and you’ll have to call them and specifically inquire about tax withholding on a ticker-by-ticker basis. DOOO has a 0% rate at Schwab, whereas Fairfax India has a 15% rate.

    1
    1. Terence

      Thanks, WW for the useful tax provisions. This is what “should be”, and it’s good that IB strictly follows. However, as you’re beginning to allude to, some brokers don’t follow or are inconsistent, and if your IRA is hit with the w/h tax, it might be impossible or at least too time consuming to get corrected.

      1. W51W52

        Just do all tender offers at Interactive Brokers :). Schwab also charges a $9.95 per corporate action fee, which makes doing smaller tender offers (like BMNM) cost prohibitive.

        Honestly though, Schwab is actually better for buying large cap U.S. and OTC stocks since they don’t charge a commission, period. Interactive Brokers still charges $0.005 per share for OTC stocks. On the flip side, Interactive Brokers is vastly superior in terms of foreign stocks. Almost any market you can think of, you have access to.

        1
    2. Jim Davis

      Interesting . So in your experience , when doing these in an ira/roth at IB, the full proceeds are deposited with no withholding of any kind? And no hiccups.

      Also , in the case of dual listings (USA/ CAN), I presume tenders are accepted from positions in either location.

      1. W51W52

        I can confirm from HCG, XBIT, GAPFF, GMP, and ORC.B tender offers that there have been no CAD withholding tax in my IRA/Roth IRA. at IB I can also confirm that dividend payments received from Canadian stock that I own/owned (ORC.B, AIM.PR.C, NEO, DRA.UN) that no withholding tax have ever been withheld.

        In case of DOOO, I called the company to confirm that both TSE and Nasdaq shares are acceptable for tender. I have not called WSG yet, but I would presume the same treatment.

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  8. Aidan

    Is there anyone here from Australia who has an understanding of the foreign tax offset rules?
    From what I can understand the first $1000 or foreign tax can be credited back, and we pay 10% foreign tax on Canadian dividends.
    So if there was only one odd lot offer per FY valued at $10,000 AUD then we would potentially be eligible to claim back all of the foreign tax?
    thanks

  9. Brian

    I just talked to Vanguard corporate actions and they said that IRAs are exempt from any witholding. Didn’t use to be the case but is now. BTW deadline is today for submitting shares, and it takes a day to load, so not advisable to buy there if you don’t already own it.

  10. Ilja

    BRP tender offer was completed around the middle of the price range (C$103.5/share). The idea is closed with a nice C$795 (8.7%) gain in 1 month.

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