United Rentals (URI): Arbitrage Opportunity
U P D A T E
URI should cash out odd-lot holders by the end of July—resulting in a 160%+ annualized profit for arbitrageurs.
T H E S I S
On June 16, URI commenced a Dutch auction tender offer for 27 million of its common shares. Odd-lot holders will have priority to receive an amount between $22 and $25 per share. At the low end there is a 14%+ arbitrage opportunity (160%+ annualized, depending on the expediency of management, brokers, etc.).
Partial tenders are almost categorically bad investments. If the offer price exceeds the market price, everyone will tender shares and cash distributions become prorated. After the company returns shares not purchased, arbitrageurs rush to sell and market prices fall. The net return of this “Prisoner’s Dilemma” is usually around 0%.
In the case of URI, there is no after-deal risk because odd-lot holders will be cashed out in full. The primary risk is that management may cancel the tender offer if American equity indices fall by 10% during the offer period. Since URI’s intrinsic value appears to be significantly higher than its current price, this would likely result in only a temporary loss.
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[...] (or $15/month). I recently bought a year’s subscription when it was still $100/year. » Stable Boy Selections – His 7/8 post reminded me about this offer, which I had actually forgotten about. » New York [...]
The URI market price condition was waived, but not the condition that the S&P 500, DJIA, NASDAQ, NYSE cannot fall more than 10%. The 10% could be broken through as soon as tomorrow on at least the NASDAQ if not all 4. I am playing it but a little worried.
TT,
Thank you for highlighting this important risk. I believe it is a small one, since United Rentals is an above-average company selling at a fair price. As capital expenditures have exceeded depreciation for more than three years, it appears that management sees significant growth prospects. (The earnings record has borne them out.) Meanwhile, the business is selling at a small multiple to its earnings in 2005, when URI’s earning power was lower. We can also infer from the waiver that management thinks $22 is an attractive price.
Shouldn’t you adjust your estimation of loss to something more significant than “almost zero” in light of getting burned on SHO. Those types of this happen all the time, just look at HD last year
Yes, it would be appropriate to elaborate on this risk.
I was not burned on SHO by any means… it must have resulted in a loss of $100 total ($50 for each of my two accounts). There was a good opportunity to sell out at around $18.00 after management changed the offer price range; in fact, I updated my post when the new information came out.
Arbitrage will no doubt provide positive returns in bear markets, but I must warn that you must read constantly and act quickly.
I agree with you that the risk of cancellation/ammended price range is not a large one here(but it is larger than say the recent SY tender). I think that if URI had wanted to ammend the deal they would have done so at the first opportunity. I would expect that the other price conditions will be waived as soon as they are broken.
URI went to great lenghts to clear the way for this tender, by buying out Apollo’s bonds, and at a price that implies a URI price around 24. I think some of the big holders such as Fairholme want this to go through at the 22, and would not tende4r their shares any lower given the value of the company.
But I could be wrong….