Quick Pitch: Nordic Waterproofing (NWG:ST)

Potential Higher Offer – Upside TBD

 

SSI member Andreas shared this interesting opportunity to bet on a higher mandatory offer for NWG. Currently, investors are risking only 2 SEK (1% downside) to potentially gain SEK 20+/share (10%+ upside) if the mandatory bid is raised. The company is listed in Stockholm, Sweden, with a US$350m market cap and US$1.7m average daily trading volume. The stock can be purchased through Interactive Brokers and probably other brokers as well.

Nordic Waterproofing is a supplier of waterproofing products for roofs and other construction products and also provides installation services in Northern Europe. Last month, a much larger and more diversified peer Kingspan Group increased its stake in NWG from 24% to 31%, surpassing the 30% Swedish mandatory takeover bid threshold. A mandatory bid to all other NWG shareholders will be placed sometime next week. The price will be SEK 160/share – the level at which Kingspan made the latest share purchases from two Swedish investment houses. That’s a 14% premium to pre-announcement levels. NWG shares trade at SEK 162, reflecting the market’s expectation of a higher bid.

Right after Kingspan announced the upcoming mandatory bid, several reputable event-driven hedge funds, including Samson Rock Capital and TFG Asset Management acquired large stakes in NWG. Samson now owns 5.4% and TFG holds 10.4%. TFG has apparently accumulated its holding through CFDs, which are mostly used to bet on short-term price swings.

These funds are jumping on every mandatory offer with hopes of a higher bid simply due to the protected downside. Samson Rock has a solid track record of acquiring positions in companies where buyers increased their offers. The fund was previously involved in several such cases in Sweden, including Semcon (SEK 149/share >> SEK 157/share), Recipharm (SEK 196/share >> SEK 232/share), and HIQ (SEK 70/share >> SEK 72/share). Meanwhile, one of TFG’s funds, Polygon, through which it acquired part of the stake in NWG, has a history of opposing undervaluing takeover bids, including at Orange Belgium, Masmovil, and Realia. Thus, it seems that there’s an interesting opportunity to make short-term bet alongside much more experienced industry players.

The key question is: What are Kingspan’s true intentions for NWG? Is the buyer interested in a full takeover of the company (this would increase the likelihood of a higher offer), or will the mandatory offer be used only to fulfill regulatory requirements? A number of factors suggest that Kingspan might be after a full buyout of NWG.

  • Kingspan is a serial acquirer in the broader insulation and building envelope products space, with a number of acquisitions completed in recent years (>€1bn spent on M&A in 2022).
  • Kingspan generally does not simply buy and hold public stakes in smaller companies.
  • Since entering the roofing/waterproofing space in 2022 with the acquisitions of Ondura (€550m, Sep’22) and Derbigum (Sep’22), Kingspan has expressed intentions to further expand in the segment through M&A. From its latest annual report:

Early progress has been encouraging. From a roofing technology perspective, we intend to broaden our portfolio of waterproofing, and our geographic presence, through both organic and inorganic routes.

  • Just recently, Kingspan tried to acquire another diversified industry player Carlisle Companies (also involved with roofing) in a large merger of equals. However, these attempts were reportedly rebuffed by the target’s management. Just a few days after that, Kingspan raised its stake in NWG, suggesting that the buyer is now rapidly moving to another target.
  • The language in Kingspan’s mandatory offer announcement is somewhat different compared to other mandatory offer announcements in Sweden. Usually, a lack of interest in a full takeover is explicitly indicated, whereas Kingspan’s statement (available here) did not have any of this language. For example, contrast this with a similar recent mandatory bid announcement from Axel Johnson to Dustin: “Continue to support the future growth and development of Dustin as a long-term and engaged major shareholder.”
  • Another unusual aspect here is that Kingspan’s bid comes at a 14% premium to pre-announcement levels. This differs from the other four mandatory bids made in Sweden this year (Axel Johnson/Dustin, Symrise/Swedencare, Stenhus Fastigheter/Backaheden, Mellby Gård/Duni), where premiums ranged from 0% to a negative 11%.

If Kingspan is indeed interested in a takeover, the current SEK 160/share offer will not be sufficient to persuade the new shareholders/hedge funds and reach the required 90% squeeze-out threshold. The offer would likely need to be raised. The last day to accept Kingspan’s mandatory offer will be several months away, giving the buyer ample time to potentially increase the bid. One more peculiar detail here is that Kingspan has so far taken quite a while to get the mandatory bid ready. According to Swedish rules, after the breach of the 30% threshold, the mandatory bid needs to be launched within 4 weeks. We are now entering into the last week, which is quite rare as the buyers usually make the bids much faster. For example, in several recent cases, including Johnson/Dustin and Symrise/SwedenCare, the bids were launched in 2-11 days after the threshold breach. An improved offer for NWG is already in preparation.

From a valuation perspective, NWG looks to be quite fairly valued relative to its peers, so any improvement in the offer price is likely to be minimal. NWG now trades at 10.9x TTM EBITDA vs CSL at 11.1x and another Stockholm-listed competitor TREL-B at 10.1x. It’s not a very clean-cut comparison as both of these peers are much more diversified and many times larger. Moreover, a takeover by Kingspan would be highly strategic and likely offer material synergies, allowing the buyer to fold NWG operations into its current European roofing/waterproofing division. There’s also an argument of a control premium, which Kingspan would have to incorporate into its bid in order to fully buy out NWG. I suspect these are among the reasons why Samson and TFG think there’s a case for a higher offer.

34 Comments

34 thoughts on “Quick Pitch: Nordic Waterproofing (NWG:ST)”

  1. So, to be clear, SEK 160 is the current offer; and given the following:

    “The acceptance period for the Offer is expected to commence on or about 23 November 2023 and expire on or about 1 February 2024”

    The expectation is that the offer will be subsequently increased, and if it isn’t, shareholders will still be able to sell at SEK 160 anywhere up until the offer expiration date?

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  2. Does anyone have concerns with regard to approvals?

    “Conditions for completion of the Offer

    Completion of the Offer is conditional upon the Offer and the acquisition of Nordic Waterproofing receiving all necessary regulatory, governmental or similar clearances, approvals and decisions, including approvals and clearances from competition authorities, in each case on terms which, in Kingspan’s opinion, are acceptable.

    According to Kingspan’s assessment, the transaction will require merger approval from the EU Commission.

    Kingspan reserves the right to withdraw the Offer in the event that it becomes clear that the above condition is not satisfied or cannot be satisfied. However, the Offer may only be withdrawn where the non-satisfaction of the condition is of material importance to Kingspan’s acquisition of Nordic Waterproofing or if otherwise approved by the Swedish Securities Council (Sw. Aktiemarknadsnämnden). Further, Kingspan reserves the right to waive, in whole or in part, the above condition.”

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  3. For those more familiar with this, any risk that Kingspan lowers their mandatory offer before the offer period?

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    • They can’t reduce the price, the offer price level is set by the regulator at the level where Kingspan bought their last block of shares

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  4. Yeah we need a finance pro or lawyer from Sweden to list all the ways this “mandatory offer” could nonetheless break — just as in any U.S. merger. Regulatory review is the obvious one that has been flagged above. Perhaps the underlying deal docs have a financing clause or a MAE clause or any other typical thing — though I appreciate there is something nifty about this Swedish “mandatory offer” regime.

    Or: Anyone got a handy list of the last 20 “mandatory offer” situations in Sweden, for just a pure ex ante “probability of failure”?

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    • The whole point of the mandatory offer rule is that it can’t break, it’s there to protect the minor shareholders. I have never heard of a case where an offer was placed and then retracted. There won’t be any problems with the EU regulatory authorities, we’re not talking MSFT/ATVI, it’s a tiny run-of-the-mill deal. In some cases the Swedish Securities Council may give a major shareholder an exemption from the rule if they happen to go above 30% due to an upcoming rights issue. This is obviously not the case here.

      It’s important to note that while mandatory offers are not that uncommon, they are mostly non-events since there usually is no interest to actually take out the company which is reflected in the often non-existent premiums. The opposite of what’s going on here.

      The board will make an announcement regarding the valuation, if they say it’s too low I think Kingspan will raise the offer. If there is no raise and the hedge funds that own +16% decides not to sell at 160 SEK, Kingspan will of course have to make a second offer(at a higher price presumably) to take out the company, but since there is no way of knowing how they’ll act the safest option is to accept the offer regardless. In the event that the hedge funds accept 160 SEK but Kingspan does not reach 90%, the stock might very well go back to pre announcement levels.

      /Andreas

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      • This is very helpful, thanks, but I’m a little confused by this last comment:

        “In the event that the hedge funds accept 160 SEK but Kingspan does not reach 90%, the stock might very well go back to pre announcement levels.”

        So in this scenario, Kingspan does not raise its offer, several funds do NOT accept the 160 SEM offer, the takeover thus evidently dies, so the stock drifts back down to pre-announcement levels.

        But individual shareholders *who accepted the Kingspan offer* by the deadline are nonetheless cashed out at 160 SEK? Regardless of whether Kingspan reached the 90% squeeze-out level?

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      • “But individual shareholders *who accepted the Kingspan offer* by the deadline are nonetheless cashed out at 160 SEK? Regardless of whether Kingspan reached the 90% squeeze-out level?”

        That is correct.

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  5. I just discovered that the offer from Kingspan Group cannot be accepted by US residents as well as a few other countries: “The Offer cannot be accepted and shares may not be tendered in the Offer by any such use, means, instrumentality or facility of, or from within Australia, Canada, Hong Kong, Japan, New Zealand, South Africa or the United States or by persons located or resident in any of these jurisdictions.” https://www.nordicwaterproofing.com/en/nordic-waterproofing-informs-on-mandatory-offer-from-kingspan/

    While this is unfortunate, I suppose that, if the offer does go higher, then the share price will increase accordingly. The downside protection is not guaranteed, though.

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    • Andreas/DT – any reply to George’s discovery that these countries cannot tender to current offer?

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      • Unfortunate, indeed. I wasn’t aware of this and find it quite peculiar. In any case, if you can’t accept the mandatory bid of 160 SEK I don’t think this deal is that attractive, the point is the limited downside.

      • Agree, seems like this should be closed out for investors in those countries, would the author agree?

      • I can’t really see the price going lower than 160 SEK before the end of the acceptance period since that of course would be a free lunch for anyone allowed to accept. So you could still stay in and simply sell a day before the last day of acceptance. Nothing is guaranteed though, so each to his own of course.

        /Andreas

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  6. I received my election form from IB. While I’m Australian, I am a Singapore resident so I believe I can accept the offer.

    The question is, what is the play here?

    If I accept and they subsequently raise the offer will a receive the higher consideration or will I only receive the 160? Should I just “do nothing” – that way if it gets raised I’ll, presumably receive and updated election form? If not, I guess I can do a last minute tender (closer to 29-Jan-2024 expiration) to get out of the position relatively unscathed?

    Thanks for the help.

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    • The safest way to play here is just to accept the current 160SEK offer. Andreas, correct me if I’m wrong, but if the tender price is revised at a higher price before the offer expiration, this revised price will apply to all, including the shares already tendered.

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      • As long as you’re sure you’re allowed to accept you might as well wait until the last day of the acceptance period. But yes, if you accept 160 SEK today and Kingspan raises the price in a week, you will get the improved offer.

        “Each person who holds shares and participates in the Offer will certify to not being an Australian, Canadian, Hong Kong, Japanese, New Zealand, South African or U.S. person, not being located or participating in the Offer from Australia, Canada, Hong Kong, Japan, New Zealand, South Africa or the United States and not acting on a non-discretionary basis for a principal in any of these jurisdictions, or that is located in or giving order to participate in the Offer from any of these jurisdictions. Kingspan will not deliver any consideration relating to the Offer to Australia, Canada, Hong Kong, Japan, New Zealand, South Africa or the United States.”

        Even though you received the form, perhaps you’re still not eligible to accept since you’re Australian.

        If you can’t accept the mandatory bid of 160 SEK I don’t think this deal is as attractive, however, I can’t really see the price going lower than 160 SEK before the end of the acceptance period since that of course would be a free lunch for anyone allowed to accept. Nothing is guaranteed though.

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  7. This exclusion of “persons” from certain countries is bizarre.

    The definition of “person” from a legal perspective is different from citizen in the normal course of events. Ordinarily it reads something like this:

    “Australian Person means a Person who, in the case of an individual, is resident in Australia or New Zealand”.

    Now, for Americans, things might be different because of their global tax system. (I believe Eretria is the only other country with a global tax on its citizens. I think the Authoritarian Socialist State of Australia is tending that way too based on various changes in tax legislation and capital controls that they have introduced in recent years).

    Getting back on track, and avoiding a 50 page diatribe on the decline of the Australian state, I don’t think someone’s citizenship (US aside perhaps) ought to impact regulatory restrictions, as that would be discriminatory. Then again, who knows, the Australian government literally made it a criminal offence for its citizens to attempt to enter the country in May 2021 if they had been in India in the previous 14 days and threatened a penalty of 5 years in jail and a 66k fine….

    Now, seriously getting back on track, if seems logical that it won’t trade below 160 between now and the expiry of the offer. And if it gets revised up, then those who have accepted the offer will get the higher consideration, and those who cannot participate ought to be able sell their shares into the market to those who can participate at, presumably, a narrow discount to the revised offer.

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    • The Swedish Securities Council granted Kingspan an exemption. You’ll find the statement here: https://www.aktiemarknadsnamnden.se/202347
      It’s in Swedish so you’ll have to run it through Google Translate.

      Basically Kingspan doesn’t want to pay for all the extra legal stuff that comes with doing a mandatory offer to shareholders outside the EEA, since there are so few of them.

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  8. Could this result in pushback from the board and subsequently higher offer or is this hiring of investment bankers just for showcasing?

    “Nordic Waterproofing has appointed Bank of America Europe Designated Activity Company, Stockholm Branch (“BofA Securities”) to render a fairness opinion to the Board to support the Board in its evaluation of the Offer.

    The acceptance period for the Offer commenced on November 23, 2023 and is expected to end on February 1, 2024. Consequently, and in accordance with the Swedish takeover rules, the Board will provide its recommendation to the shareholders of Nordic Waterproofing at least two weeks prior to the expiry of the acceptance period for the Offer.”

    https://www.nordicwaterproofing.com/en/nordic-waterproofing-holding-abs-board-provides-an-update-regarding-mandatory-offer/

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  9. While downside is capped (for certain investors at least), what is a reasonable upside expectation here? From the writeup it doesn’t seem like there’s necessarily too much upside from these levels. Appreciate the idea and I realize this answer would be complete speculation.

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    • I would say a 10% upside is most likely here, with a 20% best-case scenario. However, as you say, it’s purely speculative given the current valuation.

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  10. The board will give its recommendation to the shareholders on February 6, that will probably give a clue about the potential upside, if there is any.

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    • The board recommends the shareholders not to accept the offer from Kingspan. Hopefully we’ll now see a raise, although the stock already trades at 170 SEK vs the 160 SEK offer so the upside is probably limited. Last day to accept the 160 SEK offer is still 27 March, 2024.

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      • what is the voting threshold for Kingspan? any irrevocables? what’s a reasonable bump from 160?

  11. Kingspan would need to reach 90% ownership in order to implement a squeeze-out (if it is indeed willing to go for a full takeover). The acceptance rate thus far has been reported yet. The potential bump size is difficult to guess, but could be in the range of 20 SEK-30 SEK from the initial offer.

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    • Nothing new so far, but you have to tender in order to limit the downside in case there’s no higher offer (or another extension).

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      • I am still not 100% certain if I can accept the offer or not as an Aussie citizen resident in Singapore. Normally for financial transactions eligibility is determined by residence, so I think I can. Anyway, I called Kingspan and after getting passed around 4 or 5 (nice) people I got a hold of the Corporate Secretary to confirm; but he in turn wanted to clarify it with those in the know in Sweden. He said they would email me by the close of business as I mentioned that IBs deadline is 22-Mar-24.

        If I don’t get an answer I guess the ‘right’ move would be to sell before the official expiry of the offer lest the stock fall thereafter based on the assumption that an extension or higher offer is not forthcoming.

        Did those resident in restricted countries receive the tender documentation from IB? E.g., US.

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