Well, it took a little over a year since my post pitching Nexeo as too cheap to ignore, but someone finally realized the value of Nexeo. At that time, the stock was at $8.50 and at close today it had settled at $10 / share. But then Univar announced it would be acquiring the company for $11.65. That represents ~16% premium to the closing share price and 37% since I recommended the stock.
In this post, I’ll go through what I think of the transaction, the mechanics as they are presented so far, and what to do with the stock and warrants.
The transaction is broken down into a cash and equity consideration, as shown below. Each holder of Nexeo’s common will get 0.305 of Univar’s shares (worth $8.36 based on Univar’s close price) and $3.29 in cash, representing a total value of $11.65. This represents 9.5x Nexeo’s LTM EBITDA.
I think is honestly too cheap to sell at, but the TPG and First Pacific own over 60% of the shares and voted in favor of the deal, so there’s not much investors can argue for here. Univar trades at 10x LTM EBITDA and Brenntag trades for ~12.5x. Considering the fundamentals were moving in the right direction and you can realize a signficant amount of synergies here (you don’t need 2 sales people in the same region, you can consolidate warehouses, etc.), I think the stock should have gone for a higher multiple. Univar is targeting $100MM of synergies, so in reality, you could view it as the company paid ~$2bn for $300MM of EBITDA, or 6.6x EBITDA.
Either way… I digress… and there’s no point complaining when it appears the deal is done. When you put two and two together, you actually arrive at a ~$940MM EBITDA company, as shown below. If you assume Univar is worth 10x EBITDA, where it has historically traded, I also show that I think Univar should trade up to $33 a share.
That foots to ~20% more upside in Univar’s stock based on the closing price today, accounting for the additional shares needed to be issued and the additional debt.
What should we do with Nexeo Stock and Warrants?
Well, as mentioned, I don’t think a higher price is coming for Nexeo and I would sell the common stock as it approaches $11.65. The transaction is expected to close in the 1H of 2019. I don’t think there will be much in the way of regulatory hurdles given how fragmented to chemical distribution space is.
Now to the meaty part. I recommended Nexeo’s warrants in this post, and they haven’t moved much since then. With a $11.65 take-out and a strike price of $11.50, that implies the value of the warrants is then $0.15… but it is more complicated than that.
All the press release says is, “Following the close, existing Nexeo equity warrants will be exercisable for the merger consideration in accordance with the terms of the warrant agreement.”
That is very vague. On the call, management only said that, “The structure of the transaction that we have presented today, addresses all of those equity features [meaning the warrants] in a complete way and a satisfactory way to all the holders of those investments.”
So what does satisfactory mean? Pretty vague.
That is because the value of the warrants are going to be tied to Univar until the transaction closes. Significantly. Here’s why:
When we bought the warrants, that gave us the right to acquire 1/2 share for $5.75 (or a whole one for $11.5 if you buy 2 warrants). That means we can exercise 2 warrants between now and the close and and buy the stock for $11.50. So if we exercise the stock , our total cost will be the cost to exercise + the cost of the warrants. I lay out an example below of what that means if you bought 1,000 warrants to keep it simple. This essentially means if you bought the warrants at $0.60, our new breakeven is $31.
As you can see, this is not the best outcome for the warrants, but hey, at least they are not worth zero…. They also shouldn’t trade down from $0.60 to $0.15, as that would present a major buying opportunity!
Plus, there is a decent amount of time until close (1H’19), which leaves time for both companies to increase earnings which may result in Univar’s stock appreciating above my $33 price target above. When looking at Univar’s call options, it’s March 2019 call options with a $28 strike price are trading at $4. Part of this is time value… Nexeo should also reflect time value.
Unfortunately, I did see some questions of whether the warrants will stay outstanding post-transaction. I’m still a little unclear on this and what ability Univar has to tender for the warrants, but the language in Section 4.4 of the Warrant Agreement does seem to imply that they will stay outstanding, meaning we should have some time value built into the warrants on what is arguably a better pro forma company.