Odd-lot Tender Offer — €200+ Upside (€26/share)
This situation was shared by Victor and previously covered on SSI in April (see here). Gas and electrical utility company Naturgy announced a plan to repurchase 9% of its outstanding shares at €26.5/share. It had a provision that in nature is quite similar to the odd-lot one in US. The trade played out even before the tender was launched, as the stock rose near the planned tender price by late April.
However, the setup looks interesting again:
- May 28: Spanish regulators approved the tender at €26.5/share
- May 30: It was announced that the tender period will run from May 30 to June 13.
- The stock currently trades at €26/share.
- Small accounts – the exact amount of shares is not known, but likely to be around 400 or more – will be accepted on priority basis.
- This means there’s a chance to earn €0.50 on each share that gets accepted on a priority basis.
- That’s around €200+ upside in just two weeks with minimal risk.
This tender includes a Spanish version of the “odd-lot priority” rule. The priority threshold will depend on how many shareholders choose to tender shares. Assuming participation from all shareholders and no major change in shareholder count, the odd-lot threshold is likely to end up at around 400 share.
I’ve outlined in detail how this Spanish rule works in the previous NTGY pitch. Here’s the same thing outlined in the new tender offer document (page 32):
The relevant excerpt translates as follows:
III.5.1.1 Rules of Distribution and Proration
In accordance with the provisions of Article 38.1 of Royal Decree 1066/2007, when the total number of securities included in the acceptance declarations exceeds the maximum limit of the Offer set out in section II.1 of the Prospectus — that is, 88,000,000 shares representing 9.08% of Naturgy’s share capital — the following rules shall apply for the settlement of the operation:
(a) Linear distribution:
The distribution will begin by allocating to each acceptance an equal number of shares, calculated by dividing 25% of the total Offer by the number of acceptances. Acceptances submitted for a number of shares lower than the amount determined in the previous paragraph will be fully accepted.(b) Distribution of the excess:
The remaining amount not allocated under the previous rule will be distributed proportionally based on the number of shares included in each acceptance.
The company currently has 57,300 shareholders. If all of them participate in the tender, the linear distribution threshold (i.e. the “odd-lot” cutoff) will be 384 shares, calculated as: 88m shares × 25% / 57,300 shareholders = ~384 shares.
The actual payoff will depend on the final number of shareholders who tender. It’s unlikely that all 57.3k will participate, so the no-proration threshold could easily end up significantly higher. E.g. if only 80% of all shareholders tender, the threshold would go up to 480. At the same time, there is also some risk that new shareholders (i.e. arbitrageurs) will enter the trade over the next 11 days and increase the shareholder count. So far, the number has stayed very stable since the tender plan announcement a few months ago. So I think it is reasonable to assume that the number of non-participating holders will outweigh the number of new entrants, meaning the effective threshold is still likely to exceed 384 shares.
There is Spanish stamp duty of 0.2%, or about 10% of the expected profit.
IBKR also charges approx $30.14 to trade 384 shares.
$30.14 should have already included the 0.2% tax.
And has anyone seen the tender election showing up on IB corporate action manager, or has anyone sent an inquiry to IB customer service?
I have inquired IB about this tender and will let the board know, if they get back to me.
Response:
Can you explain what stamp duty do you refer to? The only tax you have to pay is the capital gain tax, similar to any other capital gain
The Spanish Financial Transaction Tax of 0.2% for any Spanish stocks with market cap above 1 billion euro.
There’s an IB corporate action now.
But it says “Odd lot priority: No”.
Is this an error or since the number of shareholders is unknown, its marked as “no” just to be safe? Or IB took odd lot to mean 99 or fewer shares by mistake? Can anyone with 99 or less shares confirm if it says “Odd lot priority: No” for them too?
Is “Odd lot priority: x” something internal to IB or information IB submits together with the tendered shares?
There is no ‘odd-lot priority’ as there is not supposed to be one. How many shares will be acquired from each shareholder under the 25% linear distribution rule will be determined after the tender expiration.
Ah, thanks. Odd-lot-like is how to think of this offer but not the stated terms in it.
I got a few queries regarding ‘registered vs beneficial’ shareholders for the offer. For this trade to work out, the priority rules needs to apply to beneficial shareholders (not only registered ones, which in most instances would be your broker). The tender document is quite clear that this will be applied and beneficial shareholder level – albeit explains it using different terminology.
This translates to:
Asked an AI to translate the latest update (take with a grain of salt):
The official Board of Directors report (“Informe”) filed on June 6th states that the company has received “compromisos de aceptación” (irrevocable commitments to tender) from shareholders representing 84.97% of the total share capital.
So the “odd-lot threshold” will probably be close to 400 after all.
https://apiweb.bolsasymercados.es/Market/RelevantFactsFiles/035/OI035191.PDF
Incorrect. The 84.97% are from four shareholders only ( Criteria Caixa, Roija, GIP, Global InfraCo).
Pretty surprising tender results. 86.37 % of all outstanding shares participated. However, most of that was filled by a couple of major shareholders. In terms of headcount, which is what matters for the odd lot threshold, participation was much lower than expected: only 2,887 out of 57,500 shareholders tendered.
As a result, the odd lot threshold ended up at 7,620 shares compared to the 400-500 I was anticipating. The idea still played out well, but in hindsight, I could have sized this a lot bigger.
Victor, thank you for sharing.
Spanish PR – https://apiweb.bolsasymercados.es/Market/RelevantFactsFiles/035/OI035392.PDF
Well that’s strange. I bought 380 shares and tendered them all through IBKR. The tender seems to have gone through and now I have 317 shares, so only a small fraction were tendered. The same thing happened for both my account and my wife’s account. Did we misunderstand how the tender would work or is this an issue specific to me? As it happens, it works out well because the price has gone above €26.50.
Same here. 100 offered, 13 tendered.
Same for me with IBKR, tendered 390 but left with 325.
Most likely IBKR did not bother to submit separate tender forms for each shareholder and we all got treated a single submission (or submissions from different geographies were grouped together).
While I could complain and try to dig to the bottom of it, the trading price currently is at Eur26.8/share, which is 30ct above the tender price. So I just sold the portion that was not accepted.
All worked out for the best, even if not how it was intended initially.
I think DT is correct. I tried putting the trade through another broker and they wouldn’t accept the tender because I am a US entity. IBKR probably gets around this by having a Spanish entity that holds all the shares, but puts the holdings way over the minimum threshold. For what it’s worth I had and tendered 375 shares and had 313 unaccepted. I’ve sold the remaining shares
I don’t think they didn’t bother, it’s probably not even possible. I think IB uses an omnibus (i.e. pooled) account to hold Spanish shares for customers. So, as far as the depository is concerned, there is just one position. That’s also why the odd lot threshold was so high.
I know that IB also holds UK stocks in an omnibus account, I had the same problem there as well a while ago.
See my comment on Jun 6. Based on tender documentation, IB was obliged to provide detailed information about each beneficial owner. Probably this would have required quite a bit of manual paperwork on IB’s end and therefore was not done in the end.
It’s actually important to dig to the bottom of it, even though we are lucky this time, because:
(1) We would like IB to be aware of the issue and be more careful next time;
(2) There were a few situations in the past where IB at first misallocated shares and reversed their errors later the same day or next day. So you could sell all remaining shares at eur 26.8, thinking you are lucky, and the next day find a short position showing up in your account, and potentially have to buy back at even higher prices…
Precision and certainty of trading/settlement outcomes is very important for special situation investors.
Snowball,
I did ask IBKR for an explaination. The rep says he will get back to me if it is anything other than what has been suggested here (not a great response, but my tolerance for being on hold to get an answer is limited).
There is nothing IB could do now, as the shares currently in our accounts were not accepted in the tender.
But if you receive clarification from IB on why these shares were accepted under linear method, please share with the board.
My lesson for the next time is to clarify with IB in advance if and how certain non-standard rules will be applied in a particular corporate action, especially for non-US stocks, where IB likely does not have automated algorithms.
Is there any brokerage that did get all shares tendered at 26.5? Even though we got lucky with the market price here, I’m wondering for next time.