Warrants Cashout – 12% Upside
The idea was shared by Ryan. This is a quick note on a fresh and very timely situation that will likely fade away over the next week or so. Liquidity is fairly limited with the last two days’ trading volume ranging from $60k to $130k. The situation is also not actionable to European investors, who won’t be able to buy this security due to certain regulations related to KID (key information document).
A tiny digital advertisement platform provider Direct Digital Holdings intends to completely eliminate its public IPO warrants DRCTW and is offering to buy them out at $1.20 per each warrant. The warrants now trade at $1.07-$1.11/share for a seemingly low risk 8%-11% upside in one month. The tender expires on September 26.
A minimum tender condition is that at least 50% of the warrants must participate in the exchange. The tender is very likely to succeed, as the offered premium to the pre-announcement price is significant, at around 100%. The redemption price of the remaining untendered warrants will be set to $0.35.
The tender is also unlikely to be canceled. DRCT wants to eliminate the warrant overhang in order to “provide potential investors with greater certainty as to the Company’s capital structure”. There are currently 3.2m warrants outstanding, which, if exercised (at a strike price of $5.50), would double the number of public class A common shares and dilute the total number of shares outstanding by 22%. DRCT had $5.7m in cash as of June and intends to finance the offer with a combination of cash on hand and a credit facility. Three other warrant exchange situations with similar strategic rationale have been covered on SSI before: ATCXW, LFACW and BIOX. All of these closed successfully.
The spread is partially explained by very limited coverage of the company/stock, low liquidity of warrants and visually high downside.
DRCT is a busted IPO (not a SPAC) that is now totally under the radar for most investors. The company went public in February 2022 at the lower limit of its initial price range of $5.50 – $7.50 per share, raising only $15.4m of its intended $40m. The common stock fell to $3.25/share on its first trading day and has remained at those levels ever since (currently at $2.80/share). The warrants have been trading at around $0.60 in the meantime. Despite this troubled background and difficult-to-understand product/business, DRCT’s financials are actually quite impressive. The company is growing incredibly fast – 206% revenue growth in 2021, 134% in 2022 and 74% in H1’23. Most importantly, despite its size, DRCT is profitable, generates cash, and seems pretty cheap on both last year’s earnings ($4.2m net income) and Q2’23 run-rate ($4.8m). Management owns 80% of shares (mostly through non-tradeable class B stock).
I really like this idea, thank you.
What is the expiry date of the warrants?
Also would you be able to please explain how the untendered warrants function and why they can be purchased at a fraction of the offer price?
If you have a link to which ever filing details the warrants it would be very helpful too.
Thanks,
G
By their terms, the Warrants will expire on February 15, 2027, at 11:59 p.m. Eastern Time, unless sooner exercised or redeemed by the Company in accordance with the terms of the Warrants.
However, if approved by a majority of warrant holders, the company intends to redeem all warrants for either the $1.20 offer price for those who tender or $0.35 for those who don’t participate.
Here is the link to the offer for additional information.
https://www.sec.gov/Archives/edgar/data/1880613/000110465923096587/tm2324977d1_ex99-a1a.htm
Nice idea – though is there any tax consequence on tendering? “The exchange of Warrants for cash pursuant to the Offer will be a taxable sale of the Warrants for U.S. federal income tax purposes. A U.S. Holder will recognize capital gain or loss in an amount equal to the difference between the amount of cash received and the U.S. Holder’s adjusted tax basis in the Warrants.”
Besides the 50% condition do we see any other issues with it? Thanks
It’s just a usual capital gain tax on the tender proceeds. Nothing to worry about.
Thanks Jimo. Besides the 50% condition I can’t see anything else preventing it? There’s 113k on the offer today at $1.17 –> 30%+ annualised
do we have to exercise these or just hold on?
Neither. You have to tender your shares, often by calling your broker. Some brokers allow you do tender online.
can we do that already, specifically at IB?
I don’t know. But it’s not unusual for it to take a while for brokers to become aware and define a process for a tender.
In IB – Acct Mgmt –> Corporate Actions. Otherwise call customer service.
I sent questions to Brett the IR contact and D.F. King regarding the below excerpt from today’s press release. They extended the tender deadline by two days to 9/28 and said only 95 warrants have been validly tendered. I know I have personally tendered a lot more than 95 warrants and given how close this is trading to the tender price I’m sure many others have as well.
As of September 21, 2023, approximately 95 Warrants have been validly tendered and not validly withdrawn from the Offer, representing 0.003% of the outstanding Warrants. Warrant holders who have validly tendered and not withdrawn their Warrants do not need to re-tender their Warrants or take any other action in response to the extension of the tender offer.
Surprising since I also tendered a lot more than 95 through Fidelity several days ago (maybe a week). They show in my account with the tendered CUSIP of 254994809.
Most brokers only actually tender their customers shares just before the actual deadline. So the amount tendered when the deadline hasn’t passed yet in meaningless.
Thanks AV, I was not aware of that. Mkasson, my shares at fidelity also have that tendered cusip
IB just recently added to Corporate Actions manager. For one, my shares weren’t tendered.
If the offer succeeds it appears they will buy the remaining warrants back at 35 cents. So it seems like everyone should be tendering to protect themself from the consequences.
My question is, what is the risk say if I buy on the 28th that my tender isn’t recorded by the end of day and I get forcibly repurchased at 35 cents? And is there a cutoff day we want to stop buying before the end of the tender to ensure our tenders get recorded?
I wonder if the time it takes the trade to settle would cause a problem for you. i.e. Can you tender warrants that you don’t have because they haven’t settled yet?
Cutoff date varies by broker, I recommend calling ahead to ask them. Stifel (dealer manager) confirmed what AV shared above.
I shorted some shares today thinking they should fall (drastically?!) once the corp deadline passes. Seems too late for an extension now and my thought was that lended shares cannot be tendered, and vice versa.
Any thoughts?
Shares that are loaned out can definitely be tendered, in which case you would end up having to pay $1.20 to close out the trade.
Ok thx, had some doubt there of course, hopefully I get a chance to cover tmrw before I have to deliver.
Lended shares can be tendered, but shares shorted today won’t settle until Monday, which is after the tender deadline.
There is a procedure for guaranteed delivery so you could buy today and tender and still get paid even though the trade settles after the deadline. Search the most recent tender offer for “guaranteed delivery” https://www.bamsec.com/filing/110465923102871/2?cik=1880613
At least at IB the deadline for that was 1pm Eastern today.
Yeah im aware and even bought shares today and successfully tendered in a couple accts. I’m more concerned with the timing of shorts getting bought in and so far it sounds like I’ll have a chance to cover tmrw morning at least. Logically speaking, DRCTW should trade down significantly but logic is not a great trading thesis these days.
Well, if you short and whomever you borrowed the shares from successfully tenders under the guaranteed delivery clause, then you will be liable to pay the $1.20. The warrants should just gap down huge tomorrow if they announced that they got enough of them tendered. I do wonder if it might be worth shorting some right before after hours trading ends in the hope that whomever buys then does not successfully tender.
Appreciate your thoughts, this is my last reply – shorts are not liable to pay the 1.20 – that amt stems from a corporate action and the company is on the hook for that when this tender is settled. What will happen if my borrowed shares are tendered is that I will no longer have a borrow and I will get bought in by my broker. This is where my broker buys shares in the open market (not $1.20, that price is irrelevant once the deadline passes). Normally when I get bought in short positions, brokers take until the end of the day or at least a few hours before purchasing shares in the open market. So my risk is the buy-in price, not $1.20.
Shorts’ biggest risk right now seems like a short squeeze which defies all logic, and is very possible these days. So I didn’t short much, but it was way too much of today’s volume.
I disagree. That’s not the procedure. It couldn’t be, as often after tenders shares never trade again, so you couldn’t even get bought in by your broker at that stage.
Sogoodesospecial is right. If the person you borrowed your shares from tenders, you pay the 1.20. The company is on the hook only for the shares it issued, not for ‘shares’ that are created through borrow transactions.
I agree with nostradamus. It is the same situation as with paying dividends on the borrowed shares – although it is a corporate action, short-sellers are liable to pay any dividends on the stock. Otherwise, the company would have to pay dividends/tender consideration twice on the same shares – once for the lender of the shares and then for the investor who bought these shares from the shortseller.
The short had attractive risk/reward whether no matter what side of the short tender discussion you’re on. Worst case was paying 1.2 after shorting 1-1.1 – that was a risk worth taking. I confirmed with both of the brokers I shorted with that once shares are tendered they are not lent out to be borrowed, and if shares are lent out they cannot be tendered (and this is not instant, it takes T+1 to “unlend”). The fact that I had shares to borrow meant those shares weren’t tendered (and could not be tendered given the deadline had passed!). 69% tender. Implications of the short tender seems like Schrödinger’s cat type dilemma by that time, better to just put on the trade and see what happens.
Are you suggesting the person who bought the shares you shorted can’t tender them?
I think you might be unpleasantly surprised when the tender offer settles.
Regardless of what happens do please update us on what happens after everything settles.
This is purely academic at this point, and sorry to bet against the house (i.e. dt), but I think “Jerry” has a point given that this is a voluntary tender so shares can be existing after. [Sparing you lots of words about lending, voting, timing, CUSIP changes, etc.] He had $0.03 of downside (assuming no short squeeze) and a lot more than that as upside. Seemed worth a shot and I actually tried, but Fidelity said no warrants to borrow.
Really curious to know what happened!
The way it typically works with stock-loan desk for this kind of partial tender is that you will have two types of borrow, “guaranteed untendered” and “undecided”.
Guaranteed untendered borrow will be more expensive. If you take down “undecided” borrow (which I assume is what stock-loan desks would give retail, especially in the last few days of a tender), you might get lucky if the lender decides not tender, else you’ll be liable for the tender on your short
Interesting info, thanks! How would the stock-loan desk be able to guarantee the person loaning out the stock will not tender in the case of ‘guaranteed untendered’?
Because the owner of the stock – often a large fund/ETF – will guarantee to the stock-loan desk that they are not going to participate in the tender offer and they will share in the higher borrow fee of the guaranteed untendered shares.
Is a short seller presented with the option of shorting either bucket?
Would one expect there to be two buckets with an obscure security like this one?
If nothing is specified, then borrow is always by default “undecided”, i.e if the lender decides to tender then you’re liable for it. For any event/stock, you can always ask your broker to look for guaranteed untendered borrow, but indeed for a smaller name like DRCTW it might be tough to find.
In a case like this, I’m having problems visualizing how that would work. That borrow fee here should be in the tens of thousands of percent. As everybody knows the market price will go from 1.20 to 0.50 in one day: to get adequate compensation for that that fund would need to charge an astronomical one-day borrow rate.
For guaranteed untendered borrow, desks will typically quote in cents/share (or dollars/share) for the duration of an event, rather than quote as a percentage rate (which indeed would be very high and not very intuitive)
Sorry for delay, was waiting to see borrow fees on my statement then forgot about it. Nothing for 2 brokers and below response from IB about 6k shorts (I know it sounds too good to be true, but you couldn’t even pull up SLB on DRCTW at the time and there’s no cash movement on my statement to reflect otherwise).
“I spoke to our SLB Team and the provided me the following information about the borrow fees you were subject too for this stock short. The short was covered in full on 10/02 and due to the T+2 settlement cycle, you were settled short for two days (10/02 and 10/03) and paid borrow fees of 0.02 on 10/02 and 0.03 on 10/03.”
934 shares out of 15k or so were tendered for 1.20. Thanks for the feedback all, I hope someone joined me through all of it. I’m not going back to read responses at this point – whatever you thought – r/r was worth the risk. Sometimes markets are inefficient.
Thanks!