Quick Pitch: Naturgy Energy Group (NTGY:MC)

Tender Offer With ‘Odd-Lot’ Type Priority — €500+ Upside

This idea was hinted by Victor.

This setup is essentially a Spanish version of a tender offer, with an odd-lot provision and a potential €500 ‘low-risk’ upside. The opportunity likely exists due to the relative rarity of such tenders in Spain, which means some of the nuances may be unfamiliar even to the local investors. It also relies on a relatively obscure clause in the Spanish law.

Gas and electrical utility company Naturgy intends to repurchase 9% of its outstanding shares at €26.5/share. The stock is currently trading at €25/share. The opportunity here hinges on an unusual tender proration rule under Spanish tender offer law (ley de OPAs). If the tender is oversubscribed—which will most likely happen in this case—the tendered shares will be accepted in two stages:

1. The first 25% of the tender amount will be equally allocated among all tendering shareholders, i.e. the split will be based not on the amount of tendered shares but rather on the count of tendering shareholders. All accounts below the threshold will be cashed out in full.
2. Distribution of the remaining 75% of the offer is prorated based on how many shares each shareholder tendered. If you go above the distribution limit described above, you enter the standard proration pool.

This is how the tender law is worded in Spanish language:

A rough translation reads:

“1. When the total number of securities covered by the acceptance declarations exceeds the maximum limit of the offer, the following rules shall apply for the settlement of the transaction:

1.º Linear Distribution -The allocation process shall begin by assigning an equal number of securities to each acceptance. This number shall be calculated by dividing 25% of the total offer by the number of acceptances.

Acceptances submitted for a number of securities lower than the quantity derived above shall be fulfilled in full.

2.º Excess Distribution. – The remaining unallocated securities from the previous step shall be distributed proportionally to the number of securities specified in each acceptance.”

While the company has not explicitly stated the priority acceptance rule yet (which might be partially a reason why the opportunity exists), Naturgy’s filing with the Spanish regulator (page 4) indicates that “in case the number of shares tendered exceeds the maximum number to be acquired, the distribution and proration system set out in Article 38.1 of Royal Decree 1066/2007 will apply” (translated from Spanish). And Article 38 is the one copied in above.

Naturgy is buying 88m shares and has 58,600 shareholders. Assuming full participation, the linear distribution threshold (the part that will be accepted on priority basis) would be around 375 shares (88m × 25% / 58.6k). This effectively creates a Spanish version of the ‘odd lot’ priority often seen in the US and Canadian tenders. At current prices, each share accepted in the tender will deliver €1.5eur in profit, or €550 per 375 shares.

The eventual payoff will depend on the final count of tendering shareholders. It is unlikely that all of the 58.6k will participate in the offer, so the no-proration threshold could easily end up higher. At the same time, there might be a few additional shareholders who will jump on this opportunity over the coming months if the spread remains attractive. So that’s a risk, but in any case, I would expect the number of non-participating shareholders to exceed the number of new arbitrageurs who pile into this trade. So the eventual linear distribution threshold is likely to be higher than the 375 shares.

Shareholders have already approved the tender, and Naturgy has now submitted the formal application to Spanish regulators. The review process typically takes about 2-4 months, after which the tender period begins and lasts anywhere from 15 to 70 days, at the company’s discretion. So the timeline is a bit longer compared to similar US tenders.

I think the risk of this tender getting withdrawn or blocked by regulators is minimal. The purpose of the tender is to increase the free-float (currently only at 10.9%) of NTGY stock and maintain index inclusion. The stock will be repurchased mostly from the large shareholders (which make up 90% of the shareholder base) and subsequently resold in the open market to smaller investors. See excerpt from the initial announcement (translated from Spanish):

“Improvement of the company’s free float

The Board of Directors has also unanimously decided to propose to the General Shareholders’ Meeting a voluntary takeover bid for Naturgy to acquire up to 10% of its share capital, with the aim of restoring an adequate level of free float that will allow the company to return to the main stock market indices, particularly those of the MSCI group.

The offer will be made at a price of 26.5 euros per share, and all key shareholders are expected to participate in proportion to their stake in the capital.

The process of returning the shares acquired by the company to the market will be managed by Naturgy itself with flexibility and without a set timeline, thus financially optimizing the objective of the transaction.”

Local media also suggest that the tender is meant to facilitate partial exits by some of major shareholders, including GIP and Rioja (which hold 21% each). List of shareholders:

Previous precedents

I haven’t found any recent examples of similar tenders, but two slightly older cases stand out:

• Abertis repurchased 6.5% of its shares in 2015. Out of 70,000 shareholders, around 23,000 participated. Each was able to tender 660 shares on a priority basis under the linear distribution. The offer was fairly well covered in the Spanish press at the time (see here and here), and the regulatory review took just 1.5 months.
• Duro Felguera launched a tender for 9% of its shares in 2013. Of 17,000 shareholders, ~5,600 participated. Each saw 683 shares accepted on a priority basis in the linear allocation. In this case, the regulatory approval process took closer to 2 months.