Quick Pitches For AIMC, 0273.HK, IMO.TO

AIMC – Merger Arbitrage – 9% Upside

0273.HK – Merger Arbitrage – 20%+ Upside

IMO.TO – Odd-Lot Tender Offer – $1100 Upside

NEW QUICK PITCHES

Altra Industrial Motion Corp (AIMC) – Merger Arbitrage – 9% Upside
A $5bn merger in the industrial component manufacturing industry. Producer of powertrain transmission components AIMC is getting acquired by a larger peer RRX at $62/share in cash. The transaction will expand RRX’s power transmission products catalog (bearings, shaft locks, motors) with AIMC’s clutch and brake components. Shareholder approval seems likely considering the sizeable transaction premium to the unaffected price (54%) as well as the offer valuing AIMC at 12.9x TTM EBITDA – significantly above similar-profile comps TKR (8.3x) and GTES (7.8x). Approvals from regulators of multiple countries, including China, will be required. Closing is expected in H1’23. The spread used to stand at 4% reflecting minimal closing risks. However, the spread widened to 9% recently. This coincided with the termination of DD/ROG merger after the companies were unable to obtain timely regulatory clearance from China. While Chinese regulatory approval is by no means guaranteed, several points suggest that the current spread might be overblown:

• DD/ROG merger was in a much more strategically sensitive industry – semiconductors. As of 2021, DD generated $2.1bn (17% of total) in revenues from semiconductor-related materials. Meanwhile, ROG produces circuits and other materials some of which are used in semiconductor applications. The previous large US merger to fall apart due to Chinese regulators was also in the semiconductor space – Qualcomm and NXP back in 2018. This time, however, DD/ROG transaction wasn’t blocked by the Chinese regulators, but rather both companies decided to stop the process due to prolonged regulatory review. In contrast, AIMC and RRX operate in a completely different, much less strategically sensitive power transmission industry. Moreover, AIMC/RRX has much less revenue exposure in China – around 12% vs 34%-40% for ROG and DD.
• Earlier in the year, AIMC completed the sale of the Jacobs Vehicle Systems (JVS) segment to Cummins for $325m – the divestiture received Chinese regulatory approval. Though the transaction size was much tinier, the buyer Cummins was a much larger company – $34bn market cap versus $8bn of RRX.

Other regulatory approvals seem likely. Horizontal overlap in the power transmission segment (around 50% of sales for both companies) is minimal. Moreover, the powertrain component industry is highly fragmented, with many smaller competitors in the market. The combined company would have only 11% of the power transmission component market share globally. Industrial powertrain component space has also seen similar acquisitions recently. In Jul’21, RRX’s peer RBC acquired ABB’s mechanical power transmission division in a $2.9bn merger. Both companies had overlapping product offerings, including industrial bearings. Chinese approval was also required. Another notable transaction is the combination of Regal Beloit and Rexnord’s spun-off Process and Motion Control (PMC) segment to form the present-day RRX in 2021. The $3.7bn transaction, which combined two powertrain component portfolios, closed in 8 months.

The remaining half of AIMC revenues is mostly in the automation segment. Overlap in the automation segment is minimal as RRX’s automation business is in its early stages with only $200m in annual revenue compared to $900m at AIMC.

Mason Group Holdings (0273.HK) – Merger Arbitrage – 20%+ Upside
An interesting buyout at a wide discount to net cash in Hong Kong market, however trading volume is very limited. The situation was covered on Turning Rough Stones substack. Financial services company Mason Group Holdings is a net-net trading at a quarter of its NAV (HK$0.026/share price vs NAV of HK$0.095/share). NAV is comprised mostly of cash (57%), private investments, receivables and very insignificant amount of liabilities. Discount to just cash and public investments stands at 50%. Mason Group has received hostile takeover offer from a Chinese investor Yam Tak Cheung (his fund owns Forbes). The buyer has already launched a tender offer for all outstanding shares priced at HK$0.0311/share – 20% above the current price levels yet still a massive 42% discount to cash. The offer will expire on November 18 and acceptance from least 50% of outstanding shares is required for the offer to pass. The board has recommended shareholders not to tender calling the offer unfair and undervaluing the business. It would seem that at such a lowball valuation the tender is bound to fail. However, there are a few interesting aspects to consider here.

• Many shareholders could still decide to exit at a wide discount to cash. Mason Group generates revenue mostly from brokerage services and lending. The company is a poorly-run cash-burning machine that has been destroying shareholder value for many years now. The opportunity to exit this illiquid stock at a solid premium to market prices doesn’t look that bad compared to the prospect of continuing to deal with incompetent management that is apparently unwilling to return the excess cash to shareholders anyways.
• Another price bump is also not out of the cards. Yam Tak Cheung has already increased the price once before – when the takeover interest was announced in June the intended price was HK$0.0265/share. This was raised by 17% to the current levels in Oct with the launch of the tender. The offer was not named final and there’s certainly plenty of headroom for a material raise while still leaving the acquisition attractive enough for the buyer – the tender still comes at 42% discount to cash, not counting other investments on the balance sheet.
• Two major Mason Group’s shareholders with 26% combined ownership at the time voiced their opposition to the initial HK$0.0265/share offer (here and here). In the following weeks one of these shareholders almost doubled its stake in Mason Group from 9% to 16% at an average price of HK$0.021/share. The two holders now have a 33.6% stake. Since the offer was raised in mid-Oct neither of them have made any comments on the improved price (or at least their objections were not passed to shareholders by Mason Group’s management). That might be a positive sign and another price bump could seal the deal here.
• What happens to Mason Group share price after it appears that most of the shareholders decided not to sell at HK$0.0311/share? Does the price decline because the offer failed or does the price go up because most shareholders see much more value? The downside to pre-announcement prices is only 10%-20% so might be worth a bet just to see what happens here.

The information available on Yam Tak Cheung is quite limited. His main investment vehicle is Integrated Asset Management Limited fund, which owns Forbes. However, Yam Tak Cheung also was involved in several shady dealings in the past (2006-2009), as detailed by a prominent Asian investor/activist David Webb here.

Imperial Oil (IMO.TO) – Odd-Lot Tender Offer – $1100 Upside for Odd Lots (if priced at the upper limit)
Imperial Oil recently announced a tender offer for C$1.5bn worth of common stock or 3% of shares outstanding. The tender range is very wide and set between C$72.5 and C$87/share. Paid-up capital is only C$1.75/share, meaning the situation is actionable only to Canadian shareholders or accounts not subject to Canada’s withholding taxes. Odd-lot holders will be repurchased on a priority basis. Offer expires on the 9th of December. Shares currently trade in the lower half of the tender range. Due to the small tender size and pro-rata participation from the largest shareholder Exxon Mobil (70% stake) arguments in favor of the upper limit pricing are limited. The only interesting angle here is that 6 months ago (covered on SSI) IMO conducted a similarly sized C$2.5bn tender at C$62-C$78/share with Exxon Mobil also participating. Surprisingly ended up priced very close to the upper limit at C$77/share, suggesting most shareholders were unwilling to sell below these levels. The odds of this repeating again are dimmer given the fact that WTI was trading at $97-$122/bbl range in May-June vs the current levels of $89/bbl.

PREVIOUS QUICK PITCHES PLAYING OUT

Atlas Corp (ATCO) – Expected Higher Bid – Completed +7%
Atlas Corp idea was highlighted here and here. Privatization of containership lessor ATCO by its two major shareholders (Fairfax Financial Holdings and Washington family) and CEO. The buyer consortium held 68% stake and initially came with a non-binding proposal at $14.45/share. The spread to the offer stood at 2%. We argued that the offer is likely to be increased given the opposition from minority shareholders/activists requesting at least $16.5/share. The buyers yielded and announced a final proposal at $15.5/share – still a dollar below what the activists were asking. However, in the light of a sharp macroeconomic and charter rate backdrop since the initial offer (peers plunged 20% in the meantime) the updated proposal was more attractive than might have appeared at a quick glance. The spread was eliminated after signing of the definitive agreement. The idea returned 7% in 2 months.

U.S. Well Services (USWS) – Merger Arbitrage – Completed +8%
Consolidation in the US fracking space that was first covered here. ProFrac was acquiring U.S. Well Services for stock consideration. The spread stood at 11%. A number of arguments suggested the merger was likely to close. The buyer had recently IPO’ed and was actively rolling up peers. Shareholder vote was guaranteed by the target’s general partner, which owned 40% stake in USWS and supported the transaction. Regulatory hurdles seemed unlikely. The main risk was historical borrow rate volatility. However, at the time borrow fees stood at 8% and remained stable at around 10% till the merger closed. The idea returned 8% after hedging costs in 3 months.

Bank of Guam (BKGM) – Reverse Stock Split – Completed +$300
This situation was highlighted in the 1st issue of our weekly report. As a quick reminder, Bank of Guam was a regional bank in a US territory. It intended to propose a 1-500 reverse stock split at the upcoming annual shareholders’ meeting. Holders of less than 500 shares would be cashed out at $14.75/share, which offered a $300 upside for odd-lot positions. Shareholder approval was guaranteed as directors owned 54% of shares. As expected, the proposal was successfully passed in the BKGM’s shareholder meeting, and in the beginning of Nov, BKGM announced the completion of the reverse stock split. Odd lot (499 shares) shareholders pocketed $300 in 4 months.