3M Company (MMM) – Split-off – $1000 Upside
Current Price: $148.12
Offer Price: $158.49
Upside: 7% or $1000 (for odd-lots)
Expiration Date: August 31
After a 1.5 year break, we’ve finally got another split-off transaction. 17 similar split-off transactions have previously been posted on SSI (the most recent ones are IFF/DD and ECL/APY). I recommend reading through those and especially checking our in-depth Analysis of Split-off Trading Strategies to examine share price behavior, risks, and strategies involved in this kind of transaction. So far all of these have worked out as expected, however, certain risks still remain.
Diversified industrial products giant 3M Company (MMM) is divesting its Food Safety business to food/animal safety product manufacturer Neogen (NEOG). The business will be split-off and merged into NEOG. Shareholders of 3M Company will have the option to participate in the tender and exchange their MMM shares for NEOG shares. The tender expires on the 31st of August.
Every $100 of MMM stock accepted in the tender will be converted into $107.53 of NEOG stock subject to the upper limit of 7.3515 NEOG shares per each MMM share. The exchange ratio will be determined on the 29th of August and calculated with the VWAP prices of both companies from the 25th through the 29th of August. At current prices, the upper limit is in effect. Odd lot tenders (<100 shares) will be accepted on a priority basis and won’t get prorated.
At the moment, there are still shortable NEO shares, however, the borrow fee jumped up as a result of this transaction (upcoming dilution) and stands at 11%/annum. It is quite bearable now, however, there is a risk of borrow fees spiking up till the expiration of the tender, which could further reduce or completely eliminate the upside. Worth noting, that unhedged play is also an option, and, in fact, it has resulted in higher returns for 13 out of 17 of the previous split-offs (although it still contains serious risks, see more below).
Important points/risks to consider (similar to other split-offs):
- Upper limit. The transaction is subject to the upper limit of 7.3515 NEOG shares per share of MMM. The upper limit is currently in effect. At the moment this offers 7% spread. However, due to the presence of the upper limit, the spread might get eliminated if e.g. MMM gets more expensive and/or NEOG gets cheaper.
- Oversubscription. The maximum amount of MMM shares that will be accepted in the tender is only 2.5%-2.6%, substantially lower than the average for previous cases (around 5%) or the last split-off of IFF/DD (26%). Nearly all of the previous split-offs have been heavily oversubscribed (10x-20x). Likely for the MMM/NEOG transaction oversubscription will be even higher. Hence, we prefer to limit the size of this trade to odd-lot only.
- Odd-lots are exempt from proration. Holders of less than 100 shares will be exempt from proration.
- Tight borrow. There is a strong chance that hedging availability is will decrease and borrow fees will go up in the upcoming weeks. As a result of this transaction, NEOG share count will double (ex-MMM shareholders will own 51% of the combined company). Fee increases and limited borrow availability adds risks of forced buy-in for the short leg of the hedged trade – this has happened for a couple previous split-offs.
- Hedge vs no-hedge. Our analysis shows that on average unhedged split-off arbitrage results in higher returns – 13 out of 17 transactions had higher profits with unhedged vs hedged positions. However, we are talking only about 7% spread and there is a substantial risk that unhedged trades will result in a loss due to volatility in MMM share price till tender expiration.
- Valuation dates and timing of the position opening. The final exchange ratio will be determined based on the VWAPs of a few days before the final ratio announcement (August 29), so one might wait till then to enter the position. IB deadline for tendering is usually noon on the expiration date, other brokers might have other deadlines. As the upper limit is already in effect, I would expect the final exchange ratio to be also set at the upper limit (this happens most often).
- Risk of Odd-lot provision cancellation. This provision has never been canceled in split-off transactions so far. The maximum amount of odd-lot shares participating in a split-off was close to 2m vs around 15m of MMM shares that can potentially be accepted in this offer. However, at least theoretically, the risk of odd-lot cancellation remains.
Transaction parties
MMM is a $82bn market cap giant, which operates in four business segments – Safety and Industrial, Transportation and Electronics, Health Care, and Consumer. Food Safety division is a part of Health Care segment and generates around 1% of the company’s revenues.
Neogen develops and manufactures products and services for food and animal safety. Food segment manufactures diagnostic test kits sold to food producers to detect dangerous substances in human and animal feed – pathogens, toxins, etc.
Both companies have recently announced Q2’22 results so no material announcements are expected till tender expiration.
I looked at ex99.1 and no where it says there is a odd-lot provision. Am I missing something?
“An exception to proration can apply to stockholders (other than participants in the 3M Savings Plans) who beneficially own “odd lots,” that is, fewer than 100 shares of 3M common stock. Such beneficial holders of 3M common stock who validly tender all of their shares will not be subject to proration.”
https://www.bamsec.com/filing/114036122028130?cik=711377
@dt
Thanks for the writeup. You mention that “The maximum amount of odd-lot shares participating in a split-off was close to 2m” – Pretty sure that DD/IFF In Feb ’21 had over 7.9mm shares participating as odd lots…
Per page 7 of prospectus: “3M will maintain a website at http://www.3mneogenexchange.com that provides the daily VWAP of both 3M common stock and Neogen common stock for each day during this Exchange Offer. ”
https://www.envisionreports.com/3MNEOGENEXCHANGE/2022/3mneogenexchangeaug5/index.html?voting=true
I understand unhedged trades performed better than hedged trades historically. However, given quantitive tightening and current market conditions do you think this still applies?
The result from our historical split-off analysis is an average of all previous cases.
You are correct to point out, that on average unhedged split-off trades performed better. However, your guess is as good as mine whether the average precedent would apply for the next trade (in this case MMM/NEOG).
In order for this to be actually riskless, shouldn’t you need to buy puts on both Neogen and 3M? If either of the stocks falls you lose money while the ratio isn’t set. And if you short, you can also lose money (due to the upper limit) if Neogen goes up a lot. Or am I missing something?
The ratio is very likely to end up at the upper limit as it almost always has.
Also, it will probably be possible to initiate the trade when the exchange ratio is set in stone after the valuation dates – only for a couple of previous split-offs the spread was eliminated by then.
Not sure how buying puts on both Neogen and 3M would help. But hedging through Neogen puts instead of straight shorting might work, but NEOG options are very illiquid.
just checking in on this – is this a buy and tender or do we have to pick a price, if we have a pick a price, what would you recommend?
The idea here is to buy an odd lot position and tender in order to receive NEOG. Whether to hedge NEOG exposure in advance is a choice each has to make.
Any guess as to when the NEOG shares would be likely to hit the account if all goes as planned?
September 6th most likely
MMM went ex dividend ($1.49) today which explains some of the fall in price.
MMM ex divi 8/19 ?
Any idea on number of retail investors as % of total shareholders in MMM? Is it 10-20%?
What does it cost to hedge this out with an at the money put, instead of a short?
This may account for some of the downward action in MMM, https://finance.yahoo.com/news/3m-awaits-bankruptcy-ruling-could-154612843.html?.tsrc=fin-srch
NEOG has had weakness as well though. I’m not exactly sure what’s going on but this is atypical for a split off; especially since 8/4 the S&P is about break-even. 3M is down ~2% and NEOG -8%.
Maybe there is a worry that MMM’s legal issues could spill into the split off as well. I am not an attorney, perhaps someone well versed in legal issues could comment.
Hi, anyone knows when is the last date one should buy the shares to be eligible to the tender? Also, can one participate in a tender the day the shares are bought or once the settlement occurred? I am using IB as a broker. Thank you
NEOG fee rate is 21% on IB now
Spread still sitting at ~7%. Closes 1pm NY time on Wednesday in IB.
How is everyone playing this? Seems like there is a higher than usual chance of the odd lot provision being deleted given the smaller than average MMM shares to be converted (2.5% v 5% as per dt’s initial post).
Could it be worth waiting until Wednesday morning to buy MMM and short NEOG?
“2.5% v 5% as per dt’s initial post”
Can you point to a source? I have done many split off but this one got me worried because NEOG is going up sharping during the valuation days. With no news it has to be short covering. But covering from what?
NEOG is spiking and borrow fee has dropped a lot to 4.91% on IBRK with 1.34M available as of 1130am ET 8/26, down from 20+% a few days ago. Just noise, or something happening here?
MMM down about 7%, any idea why?
*3M Cannot Use Bankruptcy to Halt 230,000 Lawsuits, Judge Rules $MMM
https://twitter.com/faststocknewss/status/1563242562248638464?s=20&t=EaULqw7giFQCPwycfgsQcg
https://ca.finance.yahoo.com/news/3m-subsidiarys-bankruptcy-fails-stop-185724112.html
Here is why, https://www.wsj.com/articles/3m-is-denied-bankruptcy-shield-against-mass-earplug-claims-11661541075?st=8a3pvcniuvboyvz&reflink=desktopwebshare_permalink
https://seekingalpha.com/news/3877162-3m-units-bankruptcy-cant-stop-230000-earplug-lawsuits-court-rules
People bailing out of MMM, especially odd lot people. They have to cover NEOG shorts as well making NEOG go up.
test
Anyone staying in this trade?
I take this opportunity to ask: How does the decision not to grant MMM the possibility of filing for Chapter 11 affect this operation? is MMM still making the change of shares?
I did some work on the businesses of NEOG and the 3M division and am comfortable holding post split off. The fear usually overshoot but the practical problem is that the exchange ratio will be wrecked. Hopefully I do not lose too much seeing through this transaction. Friends are also losing money on this deal based on my recommendation. Feels bad.
Unlucky timing with the court verdict – just two days later and the valuation dates would have been passed. Historically, most split-offs ended on the upper limit, so I think it was a prudent bet to expect the same here. Waiting till valuation dates removes the exchange ratio uncertainty, but in several cases this waiting would have fully eliminated the upside.
Now onto the current situation:
– Firstly, I do not think the ruling regarding lawsuits in one of 3M division changes anything with regards to the split-off of the Food Safety business. So this is still going to close as expected in a few days. Am I wrong in this assessment?
– While the sell-off in 3M shares might seem large for arbitrageurs (any movement seems very large when one is betting on 7% spread), it actually happened on the day when S&P was also down 3.5%. So with this backdrop, it does not seem too wide
– There still is the same opportunity to earn 7.5% spread in this split-off today. If I had no trade in this already I would happily open the position today.
– If MMM and NEOG prices remain at current levels on Monday, by my count the final exchange ratio will be 6.85.
– At this exchange ratio the trades opened earlier – unhedged or using the upper limit for hedge – would result in 12.5% gain from today and breakeven overall.
TLDR – This arbitrage is still as actionable today as it was earlier, with 12.5% pending upside. I do not see any reason to close the trade now.
(edit: corrected the remaining upside in this comment to reflect Friday’s closing prices)
Thanks for the update DT
Can someone please clarify a point for me: when is the latest date and time we can purchase MMM and tender our shares into the offer?
IB’s deadline is set at 1pm Wednesday (New York time). I assume we can purchase MMM anytime up until then and be eligible to tender?
My limited data (last 8 split-offs) indicates that there in no price change in the parent stock between days 3 and 4 (day 3 being the third valuation date). Hence, given the risk of the odd lot provision being deleted or the whole transaction being cancelled or amended, we are best off to make the trade as late as possible (Wednesday morning for IB buyers)?
“IB’s deadline is set at 1pm Wednesday (New York time). I assume we can purchase MMM anytime up until then and be eligible to tender?” – YES.
“we are best off to make the trade as late as possible (Wednesday morning for IB buyers)” – YES, if there is no change in the prices and the spread remains at 7.5% (i.e. upper limit is not reached/exceeded)
Hi dt, wouldn’t the spread be bigger than 7.5% at current prices since the 3 day average VWAP of MMM would be higher than the current share price?
Yes, if the exchange ratio ends up at 6.85 (that would be the case if today shares trade approximately around Friday’s closing prices), then the upside from current prices is almost 13%.
Re “we are best off to make the trade as late as possible (Wednesday morning for IB buyers)”:
1. I’ve been caught out a few times with IB’s online portal being slow to update and missing a cutoff
2. Also, IB sometimes arbitrarily closes a corporate action a few hours early
For meaningful oddlots, like this one, I like to remove the “IB F up” risk by purchasing and submitting the day before the final cutoff…
In the case of having a half position today, would it make sense to buy another half position on Wednesday? If so, would it be convenient for it to be an odd total position?
Is the final exchange ratio set then? Is it ~6.77?
https://www.envisionreports.com/3MNEOGENEXCHANGE/2022/3mneogenexchangeaug29v2/index.html?voting=true
Hi DT, what’s your opinion on the spin-off company NEOG’s fundamental? Is it worth holding for the long term? How do you project the price action of NEOG after the shares getting delivered to us?
Final Exchange ratio has been set at 6.7713
https://finance.yahoo.com/news/3m-sets-final-exchange-ratio-223300260.html
would it be too late to buy now? i’m still unsure where it needs to settle.
You should check with your broker first on what kind of deadlines they have. The settlement should not be required as there is a guaranteed delivery clause.
my broker requires me to wait t+2 to even tender, so i just don’t want to miss the tender date
Does anyone know the for non odd lot tenders what the historical proration is?
Historically c. 10% of tendered shares were accepted in split-off transactions. See the chart in this post: http://ssi.wpdeveloper.lt/2020/06/analysis-of-different-split-off-trading-strategies/
For NEOG/MMM, I believe the proration factor could be much lower than the historical average of 10%:
1. This splitoff is very small @ 3% of total float (16.0mm shares will be accepted out of a total of 570mm total float). In most of the other historical cases, the splitoff has been a much higher % of total market capitalization. Plus, odd lots are likely to be a consistent % of historical average participation, which could eat up the vast majority of split-off shares if participation is in line with historical precedent.
2. With the tradeoff in MMM, the current arbitrage for odd lots is much higher than expected (and much higher than historical precedents). At the moment, it is 124/6.77 = $18.32 per share which is a 16.9% arbitrage profit on a fully hedged odd lot @ $21.41 per share of NEOG. I believe this will drive up participation.
Potential Impact:
Given the above factors, together with (i) recently high trading volumes, and (ii) the enormous $30 puts/calls strikes @ 9/16 on NEOG and $200 9/16 strike call volumes on MMM, I believe NEOG could suffer a sizeable short squeeze if larger investors shorted/hedged significant NEOG shares expecting a higher proration factor than they ultimately receive (leaving them net short NEOG).
Unclear whether or not the short squeeze risk is valid, but I do think proration factor on this exchange will be lower than is historically typical (and possibly lower than the market expects).
Do you know what is the process to tender with IBKR and if we need to wait for settlement? Also, IBJR is showing zero borrow available out of a sudden today – any clue why?
pmgs, IB shows “Guaranteed Delivery”, therefore don’t need to wait for settlement on MMM with IB. Dbl check with IB chat, but that has been my experience in the past.
After market close today it will show up in your corporate actions manager tab and you will be able to tender, be sure to do it before 12pm on the 31st
Has anyone been able to initiate this tender on IBKR? As of right now (10am ET in the morning of Aug 31st, 2022), it isn’t showing up in my IBKR “Corporate Actions Manager” tab. Thanks!
HSpun, keep checking. Once I got the tender notification 1 hour before the deadline. 🥲
I made the allocation to the tender at IBKR two days ago, today i have received de confirmation from IBKR
@HomeSpunoff it came directly in my “corporate actions manager” after my purchase once I logged out / in again.
Thanks, this worked…I tendered in time.
Has anyone received the NEOG shares in their account yet…if not, can you let us know immediately when it occurs? The reason being is to sell the NEOG shares whenever they show up as quickly as possible (and I’ve received no indication from IBKR as to when the NEOG shares will show up in my account). Thanks!
I did received them, but i could´nt sell. I got a IBKR popup saying i have no permission to trade that stock.
Fractional shares not activated, perfect market moment to be clueless.
I’m confused what’s being said. NEOG shares are not available yet in any broker.
Spoke with IBRK and they say that they expect shares to be received in tonight’s overnight cycle. If you are short NEOG, it should flatten position automatically tomorrow. Not sure what happens with fractional shares. I am short 650 vs. long 650.0448 from the exchange.
Guess I was given misinformation about this. Still showing NEOG receivable in my account, but no shares yet.
Does anyone have any idea why NEOG is down so much
all the unhedged arbs are running for the exits
arbs running for the exits could have brought this down so much?
I see a NEOG.REC (Neogen receivable) since yesterday in my IB account. What happened to the share price?
Anyone have any thoughts on why neog is down almost %20. Other similiar splitoffs all went up after the close.
For the benefit of those of us who played this unhedged, any thoughts on whether it would be best to just sell NEOG shares on Tuesday or wait a bit? Thanks!
For an easy 7% these trades have been a real pita
No arb plays these unhedged. If they do , they are not arbs , they are investors at a discount
It was actually pretty easy to hedge this , the trick was to not get in too soon. The MMM legal woes and the stock market rout complicated things for many.
“No arb plays these unhedged. If they do , they are not arbs , they are investors at a discount”
While we are talking semantics, what do you call an “arb” after he/she gets bought in on a squeeze in the middle of a trade at the worst possible moment? Not sure if things are always that binary and simple nowadays.
@nostradamus indeed. Personally I try to abstain from ideas which seem to need shorting for safety. I simply don’t trust my own execution ability, and don’t have the time to pay such close attention. So I would have only done this unhedged, but I didn’t see an edge. Glad I kept my discipline in the face of so much interest in this idea.
@jwestern – regarding your comment: “Glad I kept my discipline in the face of so much interest in this idea.” At this point in the market cycle, there aren’t significant under-valued opportunities. Thus, which of your holdings do you think has superior risk-reward to this idea which (abstaining from hindsight bias) historically is a good risk-reward?…or are you in all cash? Thanks!
Uh, simple. The explain is here , in small print
..,..,. ,.,. ,.,.,., ., ..,. ., .,
Is anyone able to trade NEOG yet? At IB I still see it as a receivable (NEOG.REC). What is the consensus here on holding on for a couple of days longer?
I´m in the same situation. You can trade NEOG at Nasdaq, but not the NEOG.RECs. Is this just Ignorance in the procedure in a special situation? we have to sell when new stocks hit selling the NEOG at nasdaq ore what?
You can trade NEOG all you want. Since you haven’t been delivered the shares yet, you’d effectively be shorting Neog if you sold it and eventually that would flatten out.
@HomeSpunoff
I’m sure many would not agree with me, but as far as special situations, I would say e.g. the Twitter acquisition.
Regarding the historically good risk/reward (I presume you mean for unhedged trades?), I’m wary of relying on a statistical pattern without understanding an underlying mechanism driving the pattern. Thus, with my current understanding, I don’t have a handle on the risk/reward of unhedged split-off trades.
My other holdings are varied and not purchased recently. Have almost no cash right now.
The fundamentals of NEOG as a company have not changed over the past week and the selling due to the spin off should be exhausted soon. For what is worth, Morningstar estimates Fair Value as $26 and there have been a few insider buys recently.
16.90 and testing the lows again.
I never look at anyones estimates, they have no skin in the game
Anybody else still not received their NEOG shares?
I did this at two brokers and neither have received the shares.
I was told by Fidelity that it was supposed to be paid out two days ago, but for some reason the company delayed it. I sold the shares on a “to-be delivered” basis yesterday. I called today and Fidelity reorg said that if they don’t deliver the shares by tomorrow then they will buy me in.
@fastlapp – Does Fidelity charge you a fee to do this tender? For context, I did the tender at Interactive Brokers but am interested in the future switching to Fidelity for tenders such as this. Thanks!
Seemed strange they dragged this out so long, but they gave a 9/8 date in a press release a few days ago .
Expect today the shares will hit.
I’ve noticed roughly 5-6 business days after the transaction closes (ie August 31 in this case). Fidelity received the shares in the account at about 2pm. My understanding is that other brokers will see it soon to trade tomorrow.
I received mine today with jpm. I’m still down slightly even waiting until the day before to buy unhedged. I think I’ll hold.
Why do these relatively uninteresting ideas always generate so much discussion?
That is always a red flag to me. Too crowded, and something that warrants a lot of discussion is probably not a no-brainer investment.
Would be interesting to see if there is a negative correlation between performance of an idea and the number of comments under it.
I imagine there’s two things going on: relatively simple ideas like tender offers probably have more special situation newcomers participating, so there are more inquiries about the details of what to do.
Another (not applicable in this idea) is that long-lasting ideas just accrue more total comments due to time, e.g. the GROW or Ambase ideas.
It was simply the easiest/safest trade if you hedged it properly.. So I tend to disagree.
and timed it right
Has anyone looked into NEOG an it’s prospects? Anyone holding on?
Hope no one hodl’d this dog of a stock .
Was weak before the market tank, this only made it worse . Chart is ugly .
Anyone hold onto this one? It’s made a great comeback from the October lows but still down from at least my entry.
I kept the NEOG. My reasoning was I had nowhere else I wanted to put money, I like spin-offs in general, and sitting on my hands is generally cheaper than trading something I don’t have an opinion on. The COO bought a little bit around $18 also so just another reason to continue holding. Will exit as soon as I have an opinion or another use for the funds