Hilltop Holdings (HTH) – Odd Lot Tender Offer – $325 Upside

Current Price: $28.71

Offer Price: $28-$32

Upside: $325 (for odd-lot positions at the upper price limit)

Expiration Date: 27th of May

Tender offer document

Hilltop Holdings has launched a tender offer with an odd-lot provision for $400m or 16-18% of its outstanding shares. The tender range is $28-$32/share. HTH used to trade in the middle of the range, but shares have declined over the last week together with the whole market and now stand just above the lower limit. The pay-off for an odd-lot position now ranges from $70 loss to $325 in profits.

Hilltop Holdings is a financial services company, which operates across traditional banking, broker-dealer, and mortgage origination segments. The latter has been a major beneficiary of the housing boom, which caused ROE to explode from the historical 6-8% levels to 20% in 2020 and 15% 2021. However, the market environment is changing and the most recent Q1’22 results signaled that the party might be over with mortgage production income dropping 58% YoY, while the company’s ROE declined to 3.6% annualized.

A few more points to note:

• Management owns 23% and is not participating in the offer, so the tender will cash out 22% of the free float.
• Tangible book value (TBV) stands at $27.5, so tender is being done at 1.02x – 1.16x TBV.
• Last year the company repurchased 4% of shares at an average of $34/share price (1.2x-1.3x TBV). Over the last 3 years the share count has declined by 15%.
• TBV per share has grown steadily at a 12% CAGR over the last 5 years and now stands at $27.5/share.
• There is also some risk that the tender might get canceled due to the market sell-off. The condition is that SPY, NASDAQ, NYSE, or Dow should not decline more than 10% since the 29th of April. Nasdaq has already declined by 7% since the announcement. If recall correctly this condition has only been used once or twice to cancel the tender, so the likelihood of that happening here is very low.