Description

Norilsk Nickel – NILSY - $19.35

This investment idea is purely a personal account trade for reasons I’ll explain.  This idea has one of the most asymmetrical payoffs I’ve come across in a long time, and the timeline is very short (late October).  Here’s the deal:

Norilsk Nickel is a Russian company that has common shares that trade in Russia (GMKN RM on Bloomberg) and ADSs that trade on the London International exchange (MNOD LI) and on the pink sheets in the U.S. (NILSY).  Each ADS represents 1/10^th of a common share.  Average daily volume on the Russian common is about 600K while on the ADSs its 8.6 million shares in London and 77K shares in the U.S.  There are 190.63mm ordinary shares (1,906.3 ADS equivalent) and the equity market cap is $35.7 billion.  A majority of shares are closely held.

On September 8, 2011 the company announced the terms for a long-anticipated share buyback in the form of a self-tender offer.  The company said it would offer to purchase from the shareholders 14,705,882 ordinary common shares and/or ADSs representing 7.71% of the company’s issued and outstanding shares.   The price per share was set at $306 per common share and $30.60 per ADS.  The aggregate cost to purchase the shares is $4.5 billion.  Details on the tender and the offer doc can be found here: http://nnbuyback.com

On September 13, a majority of the board formally approved the self-tender offer at the price announced on September 8^th. 

On September 28^th, 2011, NILSY commenced the self-tender offer which expires on October 28^th, 8am NYC time, and here’s where it gets interesting.  If more than 14.7 million shares are tendered, shares in the offer will be purchased on a pro-rata basis, except that tenders of 100 common shares or less, or 1,000 ADSs or less, (“Odd Lots”) in each case tendered by a single securityholder, will not be subject to pro-ration. 

This means if you purchase 1,000 ADSs at Wednesday’s closing price of $19.35 and tender them into the offer, you will get paid $30.60 in the offer with no proration.  That’s $11.25 per share, or 58.1% upside in about four weeks - allowing a few days for settlement – annualize that, baby!  That’s $11,250 gain on your p.a. trade. In a month.

We know the upside, but what’s the downside?  Hard to say.  Shares haven’t been as low as they are today since mid-November 2010.  Of course they could go lower, but it looks like the market is hardly pricing any self-tender premium into the stock price.  I looked at the forward EBITDA and earnings trading multiples for Russian peers Severstal (steel and mining) and Rusal (aluminum).  Applying their averages to Norilsk’s EBITDA and EPS gets me to $18.28.  This is art, not science, but it gives me a number that seems reasonable.  That makes $1.07 of downside vs $11.25 of upside, for a very asymmetrical payoff.

Technicalities:

The offer specifically says “A single securityholder may tender only one Odd Lot, which can be either a Common Share Odd Lot or an ADS Odd Lot.  A securityholder that has tendered an Odd Lot may not make another tender of either Common Shares or ADSs.  No other tender from a securityholder that has already tendered an Odd Lot will be accepted, and any additional Common Share Letter(s) of Transmittal or ADS Letter(s) of Transmittal, whichever the case, from a securityholder that has submitted a Common Shares Letter of Transmittal or an ADS Letter of Transmittal in respect of an Odd Lot shall be rejected.

This is interesting, because if you have more than one brokerage account, it would appear that you cannot submit an odd lot for tender from more than one brokerage account.  But two things make me think this is still worth trying.  First, if your shares are held at a brokerage firm, I don’t believe the brokerage firm gives specific individual-identifying information with each holder’s shares that are tendered.  I believe they submit the shares with a blind breakdown of how many shares are odd lots and the size of the odd lots.  It is important that your broker specify that your shares are an odd lot in this case rather than aggregating all shares held by all clients as one big tender since these will be pro-rated.  You need to speak to your broker’s reorg department to specify that they need to properly mark the Odd Lots box in the ADS Letter of Transmittal.

The second thing that makes me think it’s worth trying to tender odd lots from more than one account is that even if they were somehow able to ascertain that you tendered, say, two odd lots from two different brokerage accounts, they do not aggregate them and pro-rate you on the total.  They simply reject one of the two odd lots tendered.  So you’d still get 50% of your shares taken up in the tender, which is a lot better than 7.71% (or whatever the final actual take-up is).

Conditions to the Offer:

The Norilsk unit making the offer, NN Investments, has the right to extend, amend or terminate the Offer at any time prior to Expiration Time.

NN Investments will not be required to accept or pay for any tendered Common Shares or ADSs, if (these are edited to make them briefer):

·        Any action has been instituted that would impair the contemplated purpose of the Offer;

·        There has been a general suspension of trading in securities on any securities exchange on which any securities of Norilsk Nickel, including the ADSs trade;

·        Acceptance for purchase for any Common Shares or ADSs pursuant to this offer would violate any law or regulation…

Furthermore, this offer is subject to the following conditions which may be waived at NN Investments’ sole discretion:

·        The ability of the Company to obtain financing from companies within the Norilsk Nickel group in the amount required to pay for the purchase of securities that may be tendered in the offer;

·        Trading generally shall not have been suspended or limited on the LSE, the NYSE, etc…

·        There shall not have occurred a material disruption in the securities settlement services in the UK, the USA or Russia.

·        There shall not have been declared any moratorium on commercial banking activities by the authorities of the UK, the USA or New York State or the Russian Federation…

·        No development shall have occurred which would materially adversely affect the business, operations, properties, etc.

The financing condition shouldn’t be a problem.  NILSY has an investment grade rating (BBB-/Baa2) and has net cash of $2.5 bilion.  It plans to borrow up to $3.5 billion to finance the offer.

Other Information:

There is no guaranteed delivery and no withdrawal rights, so you’ll need for the purchase to have settled (T+3) before you can tender into the offer, which means the last day to buy and be able to tender is October 24^th, and that assumes your p.a. broker doesn’t have an earlier cutoff.  They usually do so go back at least two business days.

No withdrawal rights means you can’t get your shares back until the tender is completed or cancelled, so tender as late as possible without risking missing your broker’s own cutoff.

Reason for the tender:

It’s a long messy story that you don’t really need to know to make money here, but knowing it helps everything make sense.  There are two rival/feuding Russian oligarchs involved with NILSY.   Vladimir Potanin, through a company he controls called Interros, owns 30% of NILSY.  Oleg Deripaska, through Rusal, owns 25% of NILSY. 

Rusal has a fair amount of debt.  Potanin would like to increase his stake and reduce Deripaska’s.  Potanin seems to have company management on his side.  In the recent past he got NILSY to offer to buy 15% of Rusal’s 25% stake for $8.75 billion (same price now being offered to us in this offer).  Rusal turned it down so the company made the smaller sized offer to all shareholders.  Rusal said it will not tender. 

There’s more background here:

http://dealbook.nytimes.com/2011/08/19/norilsk-offers-share-buyback-to-end-long-dispute/

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