Odd-Lot Tender Offer – C$410 Upside
Canadian O&G producer Frontera Energy has launched a tender offer for 4% of its outstanding shares at C$12/share. Odd-lot provision is included. With the stock now at C$7.8/share, the spread is pretty wide and there’s an interesting opportunity for odd-lots (99 shares or less) to pocket C$410. Paid-up capital is at C$15/share, so no withholding taxes will be applied to foreign/non-Canadian investors. The offer expires on October 17.
This transaction is quite unique. The first thing that pops out is that the premium to pre-announcement prices is very high (for a tender offer) – at 60%. I think this is because the offer is intended to function more like a dividend distribution than a standard share buyback/tender. Management has intentionally put a very high premium, so that participation goes close to 100% and the tender funds simply get distributed among shareholders with close to maximum proration. This is how management positions the transaction in the press release:
Assuming full and pro-rata shareholder participation, the Offer represents a CAD$0.48 per Share distribution equivalent to a 6.6% yield on the Company’s stock price prior to the announcement of the Offer during the Company’s second quarter 2024 results.
[…]
Offer Results in a CAD$0.48 Per Share Distribution or 6.6% Yield (to Frontera’s Share Price Prior the Offer’s Announcement) Assuming Full and Pro-Rata Shareholder Participation
Two principal shareholders, which hold a combined 55% stake, and management have already said they will tender. With this setup, the tender price and large premium are not really meaningful and don’t reflect anything about management’s views on the company’s fundamentals/outlook.
The key ways this transaction differs from a traditional dividend (besides the different structure) are:
- Some passive or sleepy shareholders are still likely to miss the offer and won’t tender. This benefits those who do participate. With such a high premium, this effect becomes even more pronounced.
- Involvement of odd-lot shareholders, who can still pocket the spread and profit from this transaction.
It’s actually quite surprising that an odd-lot provision was included in this tender. On one hand, it allows management to buy out smaller shareholders and potentially reduce future administrative costs. But on the other hand, with such a wide spread and no withholding tax, the deal is likely to attract a significant number of speculators. Buying them out doesn’t seem to align with the goal of positioning this tender as more of a dividend/capital distribution.
Therefore, this deal is definitely not risk-free to odd-lots. The biggest concern is that management might cancel or modify the odd-lot provision, if the number of arbitrageurs becomes too high. The tender document won’t be available until September 11, so the details on the conditions and odd-lot terms are still limited. However, here’s why I think this setup is still quite compelling:
- The risk-reward is attractive. Even if the odd-lot provision gets canceled and the stock drops back to pre-announcement levels (though it likely wouldn’t fall as much just from that change), the potential downside would be about C$30 per 99 shares, compared to a potential upside of C$410.
- FEC is a relatively illiquid Canadian micro-cap, meaning it’s automatically flying under the radar for a lot of investors. The amount of arbitrageurs should naturally be somewhat limited. For example, split-offs in the US typically see 4,000 to 10,000 odd-lot participants (see our Analysis of Split-off Trading Strategies). And those split-offs usually involve mega-cap US stocks and offer way bigger upside potential in dollar terms. Participation in FEC’s case should be much lower. Even with 3,000 odd-lot accounts, they’d only fill 9% of the current tender. I doubt management would cancel the offer over that. However, some risk obviously does exist. Another example is CMLS’ tender in 2022 for 8% of the market cap. The spread there also stayed wide ($200-$400 for 99 shares) right up until the offer closed. The offer had 9,500 odd-lot accounts filling nearly 50% of the tender, and yet the company still did not cancel the provision and accepted the shares. FEC’s incentives might be a bit different, but the market situation is also quite different and I don’t think that participation of odd-lots in FEC’s case will come anywhere close to those levels. CMLS is a US company, and its tender came just after the company was in play for a takeover and not long after the post-COVID retail investors boom. There are likely far fewer eyes on the FEC situation today.
- The cancellation/modification of an odd-lot provision is extremely rare. In over 10 years, I’ve only seen it happen twice due to excessive odd-lot participation. I’ll outline these cases in the section below, but the key takeaway is that these situations are highly uncommon.
Overall, I think this is a pretty intriguing deal, and it will be interesting to see how things unfold in the next month.
A couple of other details
FEC previously ran another tender offer in 2022, but it was a standard tender, unlike the one we have today. The case was covered on SSI here. That offer targeted 6% of the company at C$11-C$13/share, and principal shareholders didn’t participate. For the first two weeks, the stock traded below the lower limit, then moved close to the upper limit during the second half of the tender period. The offer was oversubscribed, with proration at 84%, and ultimately priced at C$12/share, right in the middle of the range.
On the business front, there’s really nothing much to highlight. The most telling thing is that instead of doing a normal tender at a much lower price and increasing their stakes once again, management and principal shareholders have decided to proceed with this weird deal, and this time, will tender at C$12/share. Aside from that, FEC is a typical, lower/mid-tier O&G company. It reports strong EBITDA, but that quickly evaporates due to high capex. Normalized free cash flow is hard to pin down, as it’s highly volatile, ranging anywhere from C$0 to C$100m. Growth is limited, despite management’s heavy investments and frequent talk of expansion. But frankly, the business fundamentals aren’t really the focus here and are not relevant to this particular odd-lot tender transaction.
Examples of odd-lot cases with amended terms
BLBD – this was a tender offer with an odd-lot provision announced in Sept’18 at an 8% premium to pre-announcement price. The spread stood at $200 per 99 shares. The transaction received significant attention on retail investor platforms and, eventually, management chose to eliminate the odd-lot provision. The stock dropped below the pre-announcement price. The offer ended up being oversubscribed by 12x (6.6% proration). After closing, shares fell down significantly in the following two weeks. Instead of risk-free $200, odd-lot speculators lost around $300-$600.
PKD – this wasn’t a tender offer, but a 1 for 100 reverse/forward split, with odd-lots getting cashed out at 64% premium. Upside per 99 shares stood at $850. The transaction also became quite widespread and popular in the media and retail investor forums. The number of odd-lot speculators exploded (daily volume went up to 20x above pre-announcement levels). Next month, the company amended the terms from a fixed ratio of 1 for 100 to a range going from 1 for 5 to 1 for 100 (management would choose the exact at the time of closing). Given the situation, it seemed highly likely that the final ratio will stand closer to the lower limit, so many arbitrageurs were forced to materially decrease their positions at a loss. Interestingly, so many odd-lot accounts eventually exited that the final proration ratio was set at 1 for 50.
Is it typical for Canadian companies that the US-listed shares (i.e., “FECCF” for this company FEC:TO) can participate in the tender?
I have tendered US OTC shares of Canadian tender offers numerous times and generally don’t have an issue with it. If you don’t see the notice of participation offer in your brokerage, then I would contact them.
How do you participate? If you buy the stock on vanguard do you have to contact them or something? Or do your shares automatically get bought out?
Wondering the same thing, for those accts not at IB can you tender the OTC US?
If you can buy FECCF, you can participate. It is proactive participation. You need to click on something on an online form OR (sigh) call them via telephone. Now, some places charge you a reorganization fee to participate, and it CAN GET egregious, so definitely check the fees/commissions guide per broker to see what is the charge. If you are Interactive Brokers, just buy the CAD denominated security (you can elect to pay you back in USD). Other places, you have to buy the USD-denominated OTC stock.
yes, call your broker
“The solicitation and the offer to buy Shares will only
be made pursuant to the Offer Documents to be filed with the applicable Canadian
securities regulatory authorities.” sounds like just Canada?
No. The circular filed on Sep 11 with SEDAR even explicitly adresses US investors that they should be aware that Canadian financial regulations apply, not US American ones. I haven’t seen anything excluding foreign shareholders.
US OTC “F” shares and their corresponding foreign listings are fungible. You might have to contact your broker, but the shares should be treated equally.
@dt, since paid in capital exceeds the $12 offer, does that eliminate the tax issue in taxable US accounts?
Yes, as I understand it eliminates Canadian withholding tax issue. As noted in the write-up, “Paid-up capital is at C$15/share, so no withholding taxes will be applied to foreign/non-Canadian investors.”
Am I understanding the conversion properly if buy the otc FECCF at say current price of 6 the upside is kinda capped to 2.88 if tender is at $12 CAD converted to US=8.88?
$2.88 profit potential on the FECCF vs $4 FEC.TO @ 8 current and tender at 12
Your $2.88 is USD while your $4 is CAD. It’s the same profit either way.
Any idea if one is able to buy 99 shares each in couple of brokerage accounts and still enjoy the odd lot provision?
99 Shares per broker. Check out DCBO on this website and my comment on that thread.
Circular has explicit mention that it is aggregated across brokers:
Quote: Partial tenders will not qualify for this preference. This preference is
not available to holders of 100 or more Shares even if holders have separate share certificates for fewer than 100 Shares or hold fewer than 100 Shares in different accounts.
That explicitly mentions accounts not brokers.
Would the brokers supply enough info to the co for the co to be able to identify the same person?
Is the official tender document available now? Has anyone had a chance to review it and share thoughts?
Yes, filed sep11 as expected.
https://www.sedarplus.ca/csa-party/viewInstance/view.html?id=0c11f8b7998bcd966581146e1efa04742d8dbc9914b36aea&_timestamp=2844343770356526
Quick question for those with more experience than me in these: This has not shown up in my Interactive Brokers “Corporate Actions Manager” section. Is that unusual? The others of these I’ve done with IB show up basically right away when I purchase them in that? But that may be because I just purchased the day after the tender offer was formally filed and in other ones I’ve purchased them closer to the deadline after it had been filed for a while.
It will take at least a few days for IB to send you a message about the corp action.
Thank you!
So it went through right and I can just contact my broker?
I find the odd-lot provision quite strange here. Any thoughts on possible reasons for why the management would want something like that in this case?
Also, the 2 majority holders want to tender their shares. How many should they want to tender, considering the offer’s terms? They hold 46M shares in total, plus the officers of the company said they will tender 250k.
By returning capital this way, those 2 controlling shareholders put themselves in a tough spot. The offer is for 3,375,000 shares, so if they tender, say, 3M, they risk being prorated themselves due to the existence of other unrelated tender participants. If they tender, say, 2M, they decrease the proration chances, but this way they effectively give free cash to other participants. I mean, this doesn’t feel like the best way for them to distribute excess capital.
Considering the current price of $8.1, the offer can be oversubscribed by almost 50% and the participants that bought at this price should still be at breakeven after tendering shares. This huge tender spread just seems all strange. Why return the capital using a tender (and with odd-lot provision too) instead of a regular dividend? Some regulatory or tax stuff?
Maybe they think the company is undervalued and want to get rid of the small shareholders and do a buyout afterwards? Would this make sense considering how the underlying business looks like today? It seems like the past distributions have been quite substantial too, so perhaps they’d want to sell the business later? But again, that’d probably mean they perceive the intrinsic value to be above $12 per share. Maybe they actually WANT the proration to happen, so that the shares bought back will have a significantly lower cost, which would (at some cost to the majority holders, of course) effectively increase the value of the whole company after the tender (and, in effect, the rest of their shares as well). But then again, for that to happen there’d need to be a large influx of participants, so why then would they want to have the odd-lot provision? If they want to buy shares at the lowest possible price due to proration, why attract arbitrageurs?
It all looks just so weird… Before jumping aboard any corporate situation I always try to thoroughly understand the incentives, but in this case it’s just really complex.
Of course, it’s a positive EV bet, so I’ll probably tender shares myself, but still.
Any thoughts?
The 2 majority shareholders are almost certainly going to tender all their shares – why wouldn’t you at a premium of 50%? So will basically every other shareholder. So the shares accepted will be something under 5% from each person most likely (ignoring oddlots). I think the major shareholders already expect that.
As to why they would include the odd-lot provision, I think the reason would be the same as why any other company does it even though it attracts arbitageurs. I think the goal is to not end up with a bunch of shareholders with sub-100 shares, for whatever reason, but I’m not sure. Bigger picture, I would this really shouldn’t happen, but it repeatedly does for so many stocks.
Well, for sub-100 share holders it costs a ton to mail them proxy materials or annuals, which is something that some of these companies still do. But I think it’s mostly a legacy clause that’s somehow not removed so far.
In this case, I think the company and its large shareholders are trying to distribute a tax-free dividend (the language in the PR even says so: “the Offer represents a CAD$0.48 per Share distribution equivalent to a 6.6% yield”).
And I think they will be pissed when they find out how they are gamed. Pretty sure they will never do something similar again ..
I think the present value of mailing costs is likely to be much less than US$300 that odd-lot holders are being paid.
And most of those who are collecting the US$300 checks are arbs, not existing odd-lot holders.
I’m still not seeing this in Interactive Brokers Corporate Actions section – has anyone else had this pop up yet on IB such that they can actually tender the shares on IB?
I use several US-based brokers (including IBKR), and none have popped up yet…Thus, I cannot tender my shares. I am wondering if Canada-based brokers can tender shares yet? Thanks.
In my experience IB doenst show corp act until toward the end of the offer period.
IB needs some time to process the tender offer in their system. Just be patient, no need to be the first one to submit. We’re still a month before the deadline, after all
IBKR also sent a notice today
FYI just received notice from fidelity
This is probably my 2nd or 3rd tender. Has anyone noticed from past experience if prices tended to go up from announcement date to deadline? This one definitely jumped a little.
Also given that most of the top holders said they will tender, it will most likely be oversubscribed which means everyone wouldn’t get the desired amount. For the speculators that are just trying to make a quick buck, they will most likely get out right after bringing downward pressure. Seems the optimal play is to buy say 99+n shares. Tender the 99 for the odd lot provision and sell the remaining n shares before or as close to the result date (which is usually unknown in advance I think). Just thinking about the scenarios.
I think that in most cases, tenders with a fixed consideration (not a price range) don’t offer any meaningful spread. FEC is unique because it’s structured more like a dividend than a typical tender (given the massive premiu, expected 100% participation, etc.). So, in theory, the offer itself shouldn’t have moved the price much. The stock might’ve just jumped because the broader arbitrage crowd caught onto the opportunity.
Normal tenders also don’t offer such premiums. Depending on how much additional stock you’d buy, it could quickly turn into a very different kind of bet than an “almost risk-free odd-lot play”.
I think you may have a point, but it all depends on where you enter the position. For example, some tenders tend to dip shortly after the initial announcement, making it a good entry point. I checked a few previous odd-lot tender offers on SSI from the initial publish date until the tender closed:
– HTH +2%
– IMO.TO +10%
– DOO.TO +1%
– CF.TO +1%
– FEC.TO (previous tender) +10%
FYI, I just tendered my shares with Fidelity and they make you do it over the phone. The person submitting the tender said that they are doing this by SSN rather than account number he asked if I had any other shares in other Fidelity accounts or at any third party brokerages. Not sure if this was just boilerplate precautionary statement or if this is different than a typical odd lot tender. That being said, they haven’t asked me that in past odd lot tenders. Be aware there could be a risk of getting prorated if you are tendering out of multiple accounts.
I tendered mine with fidelity over phone yesterday too, but was not asked same. I also made my election with ibkr. Fingers crossed…
read the odd lot acceptance preference terms were cancelled, so if it is oversubscribed then you all your shares will not tender? Is it worth it to just participate in the tender if you own 99?
https://www.prnewswire.com/news-releases/frontera-to-amend-substantial-issuer-bid-to-remove-the-preferential-acceptance-of-odd-lots-302259270.html
Unfortunately, the main risk has materialized, and the odd-lot priority was cancelled yesterday. The announcement came out after the market close with the company citing its intention to ensure that “all shareholders are treated equally.” This decision was likely driven by the influx of retail crowd looking to capitalize on the potential (and ultimately not-so-risk-free) odd-lot arb. The stock price might see some pressure today as speculators exit, but the price should eventually stabilize around C$7.5 to C$8/share (pre-announcement levels). Any loss on odd-lot 99 share positions should be minimal/symbolic.
Waiting for the tender and participating in it probably no longer makes much sense, given the anticipated nearly 100% participation rate.
Most recent NCIB ? $12 Tender (No Odd Lot).
Is anyone perhaps looking to see of there’s a +EV way of playing this ?
Apr VIC write up in addition to some chatter on twitter re value here.
Thanks,
+EV if you still are sitting on 90 shares I guess. Submitted for cash.