Tender offer with odd-lot provision
+21% upside (at the upper limit)
This tender offer presents a pretty interesting setup. Coveo Solutions is buying back C$50m of its shares. The price range is set at C$7.7-C$9.25/share, with the stock currently trading slightly below the lower limit. There is an odd-lot priority and odd lot accounts can get a ‘risk-free’ exposure to stock price volatility during the tender period or to the tender getting priced above the lower limit. The tender expires on July 10.
However, the key attraction for me is that this offer has a decent chance of ending up undersubscribed and in turn priced at C$9.25. If I am correct on this, then this can be played with larger positions as well.
Although this is a Canadian tender, this particular situation is actionable for most investors as CVO’s paid-up capital stands at C$6.21/share, and withholding taxes for non-residents would amount to C$0.19-C$0.45/share, leaving plenty of upside if the offer gets priced at the upper limit.
The offer is for 5%-6% outstanding shares. However, management and 3 major shareholders, who collectively hold 40% stake, are not tendering. Thus, CVO is buying back 10% of free float. (corrected my mistake: this part previously read “who collectively hold 72% stake, are not tendering. Thus, CVO is buying back 19%-23% of free float.”)
The company has already done a similar tender exactly one year ago at a price range of C$7-C$8.5/share. It was a bit smaller – C$40m or 3.5% of outs. shares). At the time, the largest shareholder Fonds de solidarite des travailleurs du Quebec (owned 24% stake) said it would tender up to 1.5% of total outstanding shares. Despite that, the offer still ended up substantially undersubscribed and priced at the upper limit. The company was able to repurchase only 70% of the intended amount. During the last year’s tender period, the stock was trading around the middle of the tender range.
This time, neither management, nor major shareholders voiced any intention of participating in the tender.
Since last year, CVO’s operational performance has somewhat improved, which further suggests that the outcome of the current tender could be expected to be similar to last year’s.
CVO provides AI based marketing, customer support and workplace experience solutions. Most of the revenue is recurring. Customers include such names as Salesforce, Unity, Honeywell, Blackberry, etc. The company has been reporting two business divisions – its core Coveo platform and Qubit (AI-based personalization solution for e-commerce websites).
At a quick glance it might look like CVO’s revenue growth has slowed down materially since last year. Historically, the company has been growing at 20-30% clip versus last year’s 12%, while for FY25 (ending March) management expects revenues to grow +7%. However, this dynamic has been going on solely because of the ongoing wind-down of the Qubit business, which is expected to be completed this year. Qubit has been experiencing substantial churn post-acquisition since 2021. Management has decided to refocus its investments on the core platform instead and has already introduced a similar proprietary offering based on Qubit’s technology/solutions. The core platform continues to grow fast – sales have increased by 19% YoY.
Most importantly, the wind-down of Qubit will allow CVO to reach profitability faster. The operations were already at breakeven on adj. EBITDA basis during the latest quarter and management expects to be EBITDA positive for the fiscal 2025.
CVO currently trades at around 3x revenues (mostly recurring), in line with the multiple it was trading at during last year’s tender offer.
Considering these developments and the similarity in pricing to last year’s buyback, I would expect most of shareholders to stay on the sidelines and not sell shares in the current offer.
Here’s a breakdown of the risk/reward dynamics for odd-lot accounts:
This is interesting. If we assume you are right and that in this case, tender may not be fully subscribed, or even if it is, only very marginally over-subscribed then am I right in thinking it is definitely worth specifying the max subscription price within the price range, rather than the usual choice of participating at any price within the range?
If you specify a price and the tender ends up getting priced (same for everyone participating in the tender) below your specified price, then your shares will not be accepted regardless if you have odd-lot priority or not.
However, if you do not specify any price (or indicate the lower limit) then your shares will be accepted in the tender and cashed out at the final tender price (I mean for odd lot accounts).
In the past, was there any case in which the tender was over-subscribed but still priced higher than the lower limit?
This could happen if, free-riders like us who do not specify any price or tender at the lower limit do not fill up all of the quota, and the other more assertive investors (who specify higher prices than the lower limit) help push the pricing higher.
My questions is: normally, in a oversubscription scenario, is tender pricing driven by free-riders or the more assertive ones?
I’ve definitely seen cases where tenders were oversubscribed but priced above the lower limit. It depends on how strongly the offer undervalues the company. The offer is executed at the lowest possible price that fills the tender. So if absolute majority tender at above the lower limit, the chance is high that the price will be set above. As you say, the amount of arb players reduce the likelihood of this happening, but I don’t think their impact is that large. In CVO case, odd-lot positions are limited to around C$750 (for one account with 99 shares anyways) and the company targets C$50m worth of stock.
this needs to be played in an IRA for USA home gamers?
Yes, IRA accounts are typically exempt from Canadian withholding taxes, at least in the context of these Canadian odd-lot tenders.
In previous tender(s), how did the stock trade after tender expired? Over upper limit? Under lower, inbetween?
In 2023, CVO traded sharply higher after the tender was completed. In fact, within three weeks, it climbed to 40% above the upper limit of C$8.5.
All told, from the date (2023/05/30) when the tender was announced, to 2023/07/30 when it peaked (tender results were announced on 07/12), stock price appreciated by >80% within two months.
This time around, the market doesn’t seem to be very excited by the tender though.
Gotcha, yeah it seems like the big diff is that the stock is trading below tender lower limit. I was thinking about holding instead of tendering but now I’ll have to rely on the #s to hope it’s ***oversubscribed.
Does the tender offer apply only to Toronto stock exchange CVO.TO shares or also to the USD-denominated over-the-counter CVOSF shares? Could not find any mention of CVOSF in the document dt shared above.
The company doesn’t mention CVOSF anywhere at all (not only in the tender doc). I guess it’s best to contact the company directly. However, CVOSF is extremely illiquid and basically impossible to buy anyways.
“management and 3 major shareholders, who collectively hold 72% stake, are not tendering”
DT how did you get to this percentage?
Are you sure this represents their stake or could it be confused with voting power given the Multiple Voting Shares?
I think Insider and Principal Shareholders own about 40% calculated as follows:
Shares: 59.4m
Multiple Voting S(MV) hares: 43.4m
Total Shares (all classes): 102.8m
material Insiders own ~7.4m shares (mainly MV Shares)
Principal Shareholders own ~33.3m shares (mainly MV Shares)
Total Insider and Principal Shareholders = ~40.7m
40.7/102.8 = ~40%
You’re correct, my mistake. Management and principal shareholders own around 40% and the tender is for 9%-10.5% of free float. However, this doesn’t change the thesis and I think the chance is high the offer will get priced above lower limit. The stock trades at the lower limit (C$7.7/share) now.
DT, please find this question constructive. As compelling as one may have found buying back 20% of the free float, can you explain how cutting that in half doesn’t change your thesis?
My main concern is that this thesis seems to rely on the previous tender being oversubscribed and priced at the high end, but the biggest difference is that the stock was trading in the middle of the tender range then. Right now it trades below the low end so it seems like more of the free float holders are likely to tender at no specified price. Please do correct me wherever necessary.
History doesn’t repeat, it rhymes. Odd lots tenders trading below the range is all the thesis you ever need.
Thanks Mr. Twain. This thesis makes a case for positions greater than odd-lots.
Its been climbing last few days. Now over $8
I think most people are going for greater than odd-lots if participating in this idea. The tiny dollar amount of odd-lot profit (at the lower limit) is not worth the effort.
So it’s actually very important to make some guesses on the pricing, proration, and post-tender price.
Such analysis is important for playing the volatility too. For example, CVO is now trading at 4% above lower limit, should we sell and wait for better re-entry point? To make informed decisions, we have to make some educated guesses.
Agree, and also need to factor in dividend which means this is trading even closer to the lower limit.
@TheRoaringKitty What dividend? Did I miss something?
Oo my bad sorry, confused with CIX. No dividend so clearly trading above lower limit!
Has the tender been confirmed yet? IBKR is telling they don’t see any indication of tender happening
same here
They always post closer to the tender and this expires July 10 so they have time. Send them a message with this link if you wanna be proactive, they’ll have it up sooner than later then.
https://www.sedarplus.ca/csa-party/records/document.html?id=4a9865e5279e40906c7ab920e4c5a04a079bfa741ef347319d7df1b766024416
I have also raised a ticket with IBKR
yeah they haven’t responded to me yet so lets see.
The tender is already on IB.
For those who own shares and have received the election by what date and time (presumably US EST) do you have to tender your shares with IB?
I ask because I haven’t been able to get any shares as yet and don’t want to buy them before the ‘technical’ tender expiry, but ‘practically’ after IB accepts them for tender.
Thanks.
IB’s deadline: 20240710 13:00 GMT-4:00
I am sure I know the answer, but just on the off-chance – is there any way to estimate how much has already been submitted for tender?
There is no way to estimate that. We will know only after management releases the tender results. By the way, the tender expires today.
Two technical questions, just in case these hypotheticals may become relevant in future situations:
(1) Suppose I believe that proration/tender pricing/post tender price decline will be less favorable than market expectation, and decide to short CVO, on what percentage of my shorted shares will I be required to pay the above-market tender price to those l borrow shares from?
I believe the % should be lower than the proration %, because less than 100% of shareholders I borrow from participate in the tender. Am I correct?
In a way, shorting in a tender is not a zero-sum game vs those tendering, because both sides can gain at the expenses of those not participating.
In particular, shorting can have a built-in edge (profiting from all of the post-tender price decline but paying less than 100% of the tender pricing premium) , at the expenses of those not participating. Am I wrong?
(2) Suppose I believe that proration/post-tender price will be less favorable, but odd lot can be profitable, and decide to short CVO in one account, but participate with odd-lot in another, both at IB. Will there be any issues (resulting from aggregation, etc)?
Just in case: you know that that’s probably illegal, right?
https://www.sidley.com/en/insights/newsupdates/2023/09/increased-focus-on-partial-tender-offers-and-compliance-with-rule-14e4
Rule 14e-4 is generally designed to preclude persons from tendering more shares than they own in order to avoid or reduce the risk of pro rata acceptance in a partial tender offer.
Hi @writser thanks for the very important and valuable information.
It means one shouldn’t be doing what is described in scenario (2) mentioned above.
However, to clarify, in scenario (1) , I mean shorting (in the belief that the results will be less favorable) and NOT participating in the tender at all.
In scenario (1), just trying to figure out in practice how the tender price premium (over market price) paid to tenderers will be allocated to share borrowers.
Given your questions, sounds like you shouldn’t be doing any of that.
Thanks for posting @writser – that’s useful to know. Particularly as it seems (to a non lawyer here) to be ‘strict’ liability ie ignorance or intention won’t be a defence.
Looks like it was way oversubscribed. 25.91% of their successfully tendered Subordinate Voting Shares purchased by Coveo. makes sense given the hype on this, probably on this thread haha.
Wonder what the long term implications are for Coveo though. Its completely tanking right now haha
https://ir.coveo.com/en/news-events/press-releases/detail/391/coveo-announces-preliminary-results-of-substantial-issuer
There was one tender accounting for ~2/3rds of the tendered shares. I’m guessing the stock is tanking because arbs were trying to tender more than an odd lot, as suggested in this writeup, and now they’re rushing to exit with their remaining shares.
Wow that one tender ruined it for all of us haha.
I had a pretty sizeable position (for me), but did a decent amount of fundamental work so am okay holding it. I actually think this is probably a decent business.
SES.to secure energy: this recent “quick pitch” tender has a similar thesis, and ended up getting price at minimum also. But the subsequent price was stable or even higher after the tender.
Coveo: the expectation was undersubscription and pricing at the max limit. Actual result: half of the 60% float tendered (or 30% of total shares competing for 6% to be bought), and got priced at the minimum.
Whether the thesis is flawed, or it was correct but the outcome was a total surprise, is a question for the more knowledgeable of us here. And how to play this type of situation in the future.
The price tanked almost 20% today after news of this tender result, suggesting that it is quite a surprise.
Totally agree. I was sort of worried about this situation (though not to this extent) so spent most of my time trying to prepare for it fundamentally. I was okay holding the position which unfortunately will have to now.
CVO will be fine. Price action is just the special sits clowns (us) bailing shares that they’d expected to get bought in the tender.
We did it to ourselves *shrug*
DT or anyone knowledgeable – given you could tender at a specified bid, can we assume that 30+ million shares were tendered at the minimum level or are they just compiling the total # of shares tendered at any level? I’m assuming the latter since no details are provided, but have no certainty.
The thought just struck me because barely 1mm shares traded today. If 30mm shares were tendered at the min bid then…
That is an intriguing though Kitty: “To Coveo’s knowledge, none of its shareholders owning 10% or more of the aggregate voting rights … will have any shares bought back”.
Does Elliot have more than 10% of voting rights? I would presume they do with 23M shares. If they’re not getting anything bought that means they tendered above the min and basically everyone who tendered below got filled…
Not sure how the math works out given the 23MM share tender from one entity, but from their press release, it seems otherwise:
Coveo currently expects that shareholders who made auction tenders at or below the purchase price and purchase price tenders will have approximately 25.91% of their successfully tendered Subordinate Voting Shares purchased by Coveo.
Yup. Saw that after I wrote this comment. There does seem to be some incongruency between that and the “none of the shareholders” comment but I think we have to assume the 25% pro-rate is accurate unless told otherwise.
Ah I guess it’s just simple math, 25,061,775 shares (purchased shares/.2591 proration) were tendered at bottom range. And the difference btwn that and 30+mm were tendered at a higher specified bid. If 23mm are from one entity (idk how this makes sense given other info), then we could expect around another 1mm shares sold off before selling pressure abates. Or we could be done now, who knows.
My expectation, that the tender will end up undersubscribed, priced at/close to the upper limit, and that it is possible to play this with a larger than odd-lot position, has totally failed (though odd-lots were cashed out without any losses). It seems that the market was also surprised by the outcome – and I think at least partially it is due to company’s misleading disclosures.
Approximately 30m shares (30% of the total outstanding) were tendered. Of these, around 24m apparently came from the largest shareholder Elliott, which tendered almost all of its stake.
At the time of the offer CVO indicated that “As of the date hereof, the Company has not been made aware that any of the Principal Shareholders intends to deposit Shares or Multiple Voting Shares under the Offer.” While this statement was factually correct, what was not disclosed is that Elliot is the largest shareholder in terms of economic interest but only has around 5% of the voting power. This way Elliot was not even listed among ‘principal’ shareholders in the tender document. Obviously, my own fault for not double-checking full ownership details either on annual information forms or on financial data aggregators (e.g. TIKR)
Elliott’s decision to participate in this offer is essentially what hijacked the trade (Elliott did not participate in the previous tender). No other major shareholder tendered.
In the ‘what if world’ – had Elliot not tendered, the offer would have ended undersubscribed and priced at the upper limit.
Elliott first invested in CVO in 2018, taking a 27% stake. The following year, it participated in another private financing, and in 2021, it saw CVO go public through an IPO. Since the IPO and until the recent tender, Elliott had reduced its ownership only from 26m shares to 24m (pre-tender). It is not entirely clear why the fund decided to sell shares now, but it seems to be linked to the ongoing retirement of Evergreen Coast Capital (Elliott’s PE arm, which is the actual owner of the CVO stake) as reported by Bloomberg last year (see link below). So the decision to sell seems to be of a structural nature and not fundamental.
Post-tender sell-off is a result of the combination of arbitrageurs rushing to unload the prorated shares and the market being cautious about the news of Elliott possibly looking to unload its remaining stake in CVO. At least that’s how I see it at the moment.
https://www.bloomberg.com/news/articles/2023-05-25/elliott-to-retire-evergreen-coast-name-for-buyout-deals
A technical question:
“had Elliot not tendered, the offer would have ended undersubscribed and priced at the upper limit.”
Suppose the tender is undersubscribed but all of them are willing to tender at “any price” or lower prices than the upper limit, then the offer will be priced at the “lowest price that clears the tender”, right?
I am thinking that, in a tender in which most participants are arbs, will this be a more likely outcome (vs. priced at the upper limit) even in a undersubscription scenario?
Arbs tend to submit “any price” applications in a tender, right?
If its undersubscribed, all you need is someone to tender 1 share at the max price and it would make the whole tender go at the max price, even if 99.9% of everyone else tendered at the minimum.
Thanks for the information DT. Curious to see what happens with CVO over the next few months but helpful color.
Is anyone else still stuck in shares? Trying to think about if this recovers a bit or do i just take it to the face haha
Price action a little peculiar here, no?
Am I seeing it correct that there was just no trades today, or am I missing something? If so, do we think Elliot are out or just think it’s a waste of time selling into this weakness or have an informal limit in their mind ($6.00?) below which they wont liquidate?
Any insight welcome!
Canadian Stock Exchanges are closed today / trading holiday AFAIK.
That would explain it, thank you!
June financials out.
https://finance.yahoo.com/news/coveo-reports-first-quarter-fiscal-200100129.html