Tender Offer +$1900 potential upside
Payments services provider WEX has launched a $750m tender offer, aiming to repurchase ~12% of its outstanding shares. The tender range is set at $148-$170/share. Odd lots will be accepted on priority basis. At the current price of $151, the potential returns for odd lots range between -$300 and +$1900.
I have no strong view on the final tender pricing, but the losses for odd lots are capped at $300, and investors are risking only 2% to gain optionality—either from a random upward move in WEX’s share price until the tender expiration (March 25) or from the tender offer being priced above current levels.
Management won’t participate in the offer, but they own only 1.6% combined. The company is tightly held, with six major shareholders controlling 48.5% of the stock. Most are large institutions (passive funds, investment banks, and private equity firms) and will likely tender on pro-rata basis.
The most interesting bullish angle here is that Impactive Capital, one of the six major shareholders, increased its stake from 5.6% to 6.7% ($73m incremental position) after the tender was launched. Impactive Capital was buying at an average price of $154.75/share. WEX is now funds’ largest position, which makes up almost 20% of its concentrated portfolio of only 10 holdings. Impactive is a somewhat well-known activist hedge fund that specializes in ESG-driven value creation (e.g. by pressuring a car dealership to solve labor shortage by hiring women mechanics). The fund positions itself as a long-term investor, so it’s unlikely to be playing a short-term tender arbitrage. Still, the timing of position increase is curious, especially given that WEX’s peers (CPAY, and to a lesser extent GPN) are down 12% since the tender announcement, whereas WEX share price is currently supported by ongoing tender. So if someone wanted to invest in WEX, it would kind of make sense to wait a couple more weeks. My only reasoning is that Impactive Capital expects the tender to get priced above current prices.
A few additional (and less positive) details about this setup:
- The buyback follows a significant drop in WEX’s share price over the last four months. The stock was at $210/share in the Oct’24. The decline was driven by two disappointing earnings reports. The company missed Q3 guidance in October, and then, with Q4 earnings last month. The outlook for 2025 turned out underwhelming.
- Despite looking beaten down on the chart, WEX is trading at 10x 2025E adj. EPS, which is right in line with its valuation range over the past three years.
- Management is making a big commitment to this buyback. WEX is already highly levered, with net debt at 5x EBITDA (ex. stock-based comp). Growth is slowing, guidance is weak, and the company keeps emphasizing the need to invest more in product development and marketing. And yet, they’re piling on even more debt to make this tender.
- However, it’s hard to say if this commitment should be taken at face value. The company was also repurchasing shares rapidly last year (8% on the open market) at a higher $197/share average price. Meanwhile, insiders own almost no stock, get paid extremely well, and have been only selling their shares in the open market.
-
The tender includes a standard condition, which says that major market indexes must not drop more than 10% since February 26, when the offer launched. So far, NASDAQ is already down 6.5%. In practice, this condition is more of a formality – I’ve only seen a couple tenders derailed due to it and only during the COVID panic. So it’s most likely not something to worry about.
A bit on the company’s background – WEX operates in several niche payment markets, where it holds dominant market positions. About half of its EBITDA comes from fleet cards used for refueling commercial vehicles. The rest is roughly evenly split between issuing virtual cards for B2B payments (mainly for online travel agencies to pay hotels, etc.) and administering consumer-funded benefit accounts. More background on the company can be found in this VIC write-up.
Does anybody have tender fail statistics for tenders where the “-10% of standard market index” cancel condition is met? I would like to understand how often these type of tenders get canceled.
Wasn’t there an odd lot arb covered relatively recently on SSI where the odd lot provision got cancelled?
You’re probably thinking of Frontera Energy (FEC:TO). That situation was quite different. There, management was effectively paying a large special dividend, only dressed as a tender offer. They offered a massive 60% premium and intended for shareholder participation to be 100%. The odd-lot provision should not have been included there in the first place (no idea why it was).
I have a dumb question. I understand the set up, and have seen/heard of odd lot “arbitrage” plays like this but I have never participated in the past. From a practical standpoint how does one go about executing a trade like this? Buy 99 shares, and then would one put in a good till cancelled sell order at a certain price between the tender offer range? Or is the expectation that one buys, waits for WEX to announce the tender offer price and then you can at that point place an order to close out the position?
No, you need to opt in to participate in the tender. On IB (probably similar at other brokers) you should receive a message asking if you would like to participate in the tender. The same option can be found on corporate actions page/tool. The final tenders price will be set only after the tender expiration. If you want to guarantee that your odd-lot position will be accepted in the tender you either need to tender at the lower limit or specify no tender price.
With WEX at $157 vs $151 at the time of pitch last week, this opportunity is no longer as attractive. I have exited my position with $6/share gain.
As I noted, “investors are risking only 2% to gain optionality—either from a random upward move in WEX’s share price until the tender expiration…” – that ‘random upward move’ now happened.
is it not still +ev to just hold on with the good entries?
How risky would be the probabilities of getting 99 shares at current price $156 and tender them for $170 as they mentioned they would be prioriting odd lots? thanks in advance
If you tender at a specific price, you only get accepted if the final price ends up at or above what you picked. So if you go with $170/share, there’s a good chance you get nothing, since that’s the top of the range and probably won’t be hit.
The safer move is to tender without picking a price. Then as an odd-lot, you’re guaranteed to get accepted and just take whatever the final price ends up being. At that point, you’re basically betting the final price comes in above $156. So far, I haven’t seen any strong arguments why it should be.
$154 per prelim results. About $156 on the last day of the tender period, also about this level mostly during the tender period, with a range of $150 to $160. So buying at $151 shortly after the SSI writeup gets a $3 gain if tendered, or maybe up to $6 gain if sold earlier. Buying days after the writeup gets about $2 loss. Only minimally oversubscribed, so all tenders got practically filled, whether odd lot or more shares.
https://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20250326:nBw4XpKZCa&default-theme=true
Follow-up post: 3-12-25 time of write up was when market was down roughly 8% vs when the tender was announced, so I guess it was approaching the 10% market downturn tender cancellation threshold. I am stating the obvious, but the write up timing was perfect since that was the market low.
I don’t have a record, just from memory, there seems a few odd lot arbs like this, when the stock price drops during ~10% market drops, producing good gains for risk takers when the market usually recovers.
I believe the 10% clause was rarely invoked to cancel/modify a tender when the market did fall by >10%.
Yes, rarely. I think the last time was a tender during the covid market crash.