Research Notes
Buy-back by Acron: risks and opportunities
| 15.06.10 |
The scheme for the liquidation of cross shareholdings with subsidiary company Dorogobuzh announced by Acron offers interesting opportunities for arbitrage trading. As a result of the liquidation, Acron will have fewer shares, while Dorogobuzh will have more cash assets on its balance sheet.
Acron has made a public offer to buy back 953,752 its shares, at 2% of its share capital, with the subsequent sale of the same number of shares from Dorogobuzh books (the latter holds 8.7% of Acron shares on its books). According to Acron board chairman Mr. Popov, the operation is just the first step towards the full-scale liquidation of cross ownership of shares between Acron and Dorogobuzh. On June 7, 2010, the company published the complete terms and parameters of its offer.
Opportunities for arbitrage trading. Acron’s current market price for shares is 16% lower than the buyout offer. Therefore, a transaction for the acquisition of Acron shares on the market for their subsequent presentation for buyout would earn their holders 43% in annual interest as of today (under the condition that the bid to buy out the shares is 100% met).
Fair price for remaining shares rises . If the shares presented for buyout are redeemed (which is the most likely scenario), the reduced number of issued shares will lead to a rise in the total fair value of the remaining shares by the fair price of the shares redeemed. We have adjusted our valuation model for Acron on the assumption that 2% of its shares will be redeemed in 2010 and another 6.7% in 2011. After the buyout by Acron and the subsequent sale of treasury shares by Dorogobuzh, the consolidated cash flow of the group will change only by the size of the income tax Dorogobuzh will pay on this operation. The funds spent by Acron on the share buyback will be reimbursed with revenue from the sale of shares from the Dorogobuzh balance sheet.
Risks of buyout offer:
Risk of a breach of the set buyout terms by Acron. We do not exclude that Acron may renege on its obligations under the buyout offer if stock market conditions deteriorate sharply and/or the access to financing worsens dramatically (a similar situation was observed in late 2008 and early 2009). However, we estimate the likelihood of this scenario as low.
Risk of incomplete satisfaction of bid. The risk that the greater number of shares will be presented for buyout than Acron is prepared to buy is high. This may happen if the market price of Acron shares becomes considerably lower than the buyout price at the time of the buyout.
With the decrease in the number of issued shares by Acron, our target price for Acron shares rises to USD 52.8 per share as of year-end 2010. Our target prices for Dorogobuzh are left unchanged, since on one hand, Acron’s share price has already been accounted for in our estimate and on the other, we do not know yet when and it which price the asset will be sold. We plan to adjust our valuation model for Dorogobuzh after the release of this information, while not expecting the company’s value to change significantly.
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Sectors: Chemicals & Petrochemicals, Mineral FertilizersCompany: Acron