Tender offer with odd lot provision.
Secure Energy Services has recently launched a tender offer with an odd lot provision. The company will purchase C$250 million worth of shares at between C$11.40 and C$13.00 per share (7.3%-8.3% of shares outstanding). The offer expires on June 5. Currently the stock trades at the lower limit, giving the opportunity to benefit from potential stock price increase during the tender period or from the final offer being priced above the lower limit. This is actionable only for those not subject to Canadian withholding taxes, as the paid-up capital stands at C$4.85 per share, and taxes will be applied for tender proceeds above this figure.
There are several arguments suggesting the tender might get priced higher, than where the shares are currently trading.
A major shareholder TPG Angelo Gordon will not participate in the offer. This follows April’s agreement whereby the company repurchased 13m shares from TPG Angelo Gordon, reducing its stake in SES from 19% to just below 15% (not clear why this agreement was reached). Shares were purchased at C$11.38 per share, nearly a 2% discount to SES’s stock price at the time. TPG Angelo Gordon emphasized that selling the shares to SES was a routine business activity, not a signal of any larger concerns about the company. Management notes that TPG Angelo Gordon remains a committed, long-term shareholder.
Insiders are not participating in the offer either, but they only own a combined 1% of the company.
Management has repeatedly emphasized company’s undervaluation, claiming that SES trades at a discount compared to its peers in the waste management and energy infrastructure sectors. In their latest presentation, they indicate that based on the expected 2024 EBITDA, SES sits at just above a 6x multiple, while peers (such as CWST, CLH, GFL.T, TSG, SRCL, WCN.T, and WM) average a 14.5x.
Management appears committed to addressing this undervaluation. In late 2023 they have initiated an 8% share buyback program (NCIB or normal course issuer bid) that is set to expire by the end of this year. As of the latest quarter, the company has already utilized nearly 70% of this buyback. As I understand, the current tender offer and the purchase of shares from TPG Angelo Gordon come on top of the previously announced NICB.
Both the tender and the share buybacks follow the recently completed asset divestment to Waste Connections mandated by regulators after the 2021 acquisition of Tervita. The divestment closed in February and was done at 7.4x EBITDA, a relatively high multiple despite a ‘forced’ divestiture by regulators. According to management this underscores valuation disconnect between SES and its peers.
For more information on SES and on the undervaluation thesis, please refer to this VIC article and this comment for the latest update.
“1) They just sold similar assets for 7.4x ebitda to WCN. So at a minimum this should be the floor. However, remember this was a FORCED sale, so I view the multiple as artificially depressed. Nonetheless, it is recent and in the record books. <…>
3) The value can also be determined by what a company is willing to pay to acquire SES. In the case, WM, RSG, WCN would easily pay >12x without synergies and make this VERY accretive. <…>
6) Taking everything into consideration, I still think the assumptions in my base case $19 target price are conservative.”
And for all the upcoming questions, which accounts can use this opportunity, please refer to this elaborate comment by W51W52 and subsequent discussion.
https://www.specialsituationinvestments.com/2023/11/quick-pitch-docebo-dcbo/#comment-18125
From the Offer document. That makes it a NO for many non residents
A Non-Resident Shareholder who disposes of a Share 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, if any,
of the amount paid by the Corporation for the Share, being the Purchase Price, over the paid-up capital
thereof for purposes of the Tax Act. The Corporation estimates that on the Expiration Date the paid-up
capital per Share should be not less than $4.85 for purposes of the Tax Act. As a result, the Corporation
expects that a Non–Resident Shareholder who disposes of Shares under the Offer will be deemed to
receive a dividend. Any such dividends paid or credited, or deemed to be paid or credited, to a Non-Resident
Shareholder will be subject to Canadian withholding tax under the Tax Act at a rate of 25% of the gross
amount of the dividend, subject to any reduction in the rate of withholding to which the Non-Resident
Shareholder is entitled under the provisions of an applicable income tax treaty or convention
In the US, wouldn’t you get a foreign tax credit on your 2024 taxes that’s the equivalent of the taxes you paid to Canada?
For taxable or non-IRA accounts, yes, you get a credit, but depending on your particular tax situation, the credit can be zero to the full amount of the foreign tax paid. (Just an opinion from a non tax expert.)
I’ll repeat again here, even if you’re Canadian, you need to do this in a TFSA or RRSP or similar. Otherwise, the proceeds in excess of the paid-up capital is treated as dividend income, so you pay income taxes on it.
You are taking the offsetting capital loss as well though. Assuming these are eligible dividends AND you can make use of the capital loss those making less than $111k can do it non-registered. Above $111k the tax on dividends is higher than on capital gains so it starts to work against you. Do we agree?
Not sure about the numbers but yes I think there’s a capital loss one could take advantage of. Doesn’t help me so I didn’t think of that.
Secure Energy Services announced the preliminary results of its tender offer.
Approximately 40.51m shares were tendered. Due to oversubscription, ~82% of tendered shares will purchased at C$11.4/share (lower limit).
Odd lot tenders will be purchased in full. Shares tendered above the C$11.4/share purchase price will not be purchased.
https://secure-energy.mediaroom.com/2024-06-06-SECURE-ANNOUNCES-PRELIMINARY-RESULTS-OF-ITS-SUBSTANTIAL-ISSUER-BID