Tag: Derivatives

Warrant Update: Current trading levels imply a reduction in the strike… but also appears to be a catch… $NXEO $NXEOW

Reading Time: 3 minutes

I haven’t provided an update on the Univar/Nexeo transaction in a while and given some questions I have received on the warrant mechanics plus general volatility in the market, there couldn’t be a better time.

First of all, let me just re-iterate that I think this is a good transaction. PF Univar is trading at a very cheap multiple and I see solid upside if the company realizes synergies and trades at just 10x EBITDA.

unvr target

The warrants in Nexeo should strongly benefit from this over time, if the higher price is realized. Following the acquisition, warrant holders will be entitled to receive the “Merger Consideration” through their expiration. For background on this, check the warrant agreement as well as recent proxies where it clearly outlines a PF balance sheet “adjustment to record the fair value of the Nexeo outstanding warrants (exercisable through 2021). Upon completion of the merger, the warrants will be converted into the right to receive, upon exercise, the merger consideration consisting of Univar common stock and cash, in accordance with the terms of the Warrant Agreement.” As we all know, the merger consideration swings based on the value of Univar’s stock.

As shown below, based on Univar’s stock price, the equity consideration as a % of total drops below 70%.  This is important because based on Section 4.4 in the Warrant Agreement, the strike price will be lowered.

unvr consideration

You can read the definition for yourself, but the strike price will be lowered by the difference in the strike price and (i) the per share consideration value and (ii) the Black-Scholes value.

As of right now, the “consideration” is around $8.83 (Univar is trading at around $19.50 at the time of writing) derived from the equity holder receiving $5.95 of value in Univar stock ($19.5 x .305) plus $2.88 in cash (minimum amount).

Therefore, taking the strike price of $11.50 less $8.83 less the Black-Scholes value of the warrant should get us to the new strike price.

What is the Black-Scholes value?

Well, Univar in its most recent proxy noted it uses an Option life of 2 years (the warrants don’t expire until 2021), volatility of 23.8%, and a risk free rate of 2.8%.  Plugging this into a spreadsheet and using Nexeo’s price today of $8.96 gets a implied value of $0.58.

In sum, we take $11.5 less $8.83 less $0.58 and that gets us $2.09. This is the amount the warrant strike will be reduced by. In other words, $11.50 minus $2.09 = $9.41.

What is the catch?

There seems to be one catch involved here. This is also from section 4.4 of the warrant agreement:

if less than 70% of the consideration receivable by the holders of the Common Stock in the applicable event is payable in the form of common stock in the successor entity that is listed for trading on a national securities exchange or is quoted in an established over-the-counter market, or is to be so listed for trading or quoted immediately following such event, and if the Registered Holder properly exercises the Warrant within thirty (30) days following the public disclosure of the consummation of such applicable event by the Company pursuant to a Current Report on Form 8-K filed with the SEC, the Warrant Price shall be reduced by an amount….

To me, the catch here implies that you must exercise the warrant within 30 days of close of the deal. However, the warrants may still be out of the money. That being said, if they are even slightly in the money (break even moves up to $21.5 for UNVR’s stock), it may make sense to take risk off the table.

I plan on following up with the investor relations folks to make sure I am thinking about this last component correctly.

What are your thoughts?

Nexeo to be acquired by Univar. Positive outcome for the stock… to be determined with the warrants $NXEO $NXEOW

Reading Time: 4 minutes

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. NXEO 1

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.

NXEO Warrants

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.