Tag: nexeo

$NXEOW Warrant Recap (& Maybe Post-mortem) $UNVR

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It’s been awhile since I’ve discussed the Nexeo warrants, which are now tied to Univar’s stock performance following the acquisition. At one point, I’m pretty confident this blog was the go-to place for information on the merger and its impact on the warrants.

Unfortunately, none of that matters now. We have 145 days to expiry and the strike price is $27.8034 vs. UNVR currently trading at $20.64. History would tell me that this isn’t unsurmountable, but it may not be likely that UNVR is in the money.

But  I try to be an optimist (especially because I still own a lot of NXEOW), so I do have a couple points on why I think the warrants could possibly make it. To be clear, I’m grasping for straws here because Univar really needs to make it to $30 to get the warrants sufficiently in the money.

UNVR has materially underperformed its peers  

This chart compares returns for a broad set of chemical stocks. UNVR has materially underperformed, but that makes no sense. UNVR distributes these company’s chemicals! If the suppliers are doing well, odds are UNVR should be doing well.

If UNVR had performed in line with the average of these names, it would be at $28.70 right now, not closer to $20.

Macro Data is Suggests Chemicals Should be in Strong Demand

Ok, the last chart was pretty hand wavy. But it makes sense why the chemical stocks have ripped. The underlying data is suggesting a really strong economy.

PMI is “an index of the prevailing direction of economic trends in the manufacturing and service sectors. It consists of a diffusion index that summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting”

So PMI is a measure of expansionary or declining conditions, with 50 being neutral. Clearly we are expanding in these markets.

This isn’t a perfect comparison, but look at PMI vs. the basic materials index. You can see the correlation in their performance. The only thing to remember is that XLB is a basket of stocks that should build value over time whereas PMI can only bounce between 0-100.

In my view, there’s no reason why UNVR shouldn’t be performing better. Commodity prices have improved, industries such as autos and housing (which consume a lot of chemicals) are doing much better. And all of UNVR’s suppliers are doing much better. I guess we’ll find out if they can close the gap.

Post Mortem

Since this may not pan out, I’ll go ahead and write my brief post mortem. I DON’T have regrets investing in these warrants. I say that despite the fact that I stand to lose a decent chunk of change on them.

I had strong conviction Nexeo was being underappreciated by the market and the warrants were a levered bet on that view. Nexeo was indeed taken out, despite tons of pushback from people saying Univar wouldn’t ever do it. I saw the opportunity to possibly 6x my money with downside being the ticket to play the game.

Once people digested what the acquisition meant, the warrants basically doubled in a day. But there are some real lessons here.

  • First, try to avoid warrants in companies that play in commodities. Commodities can swing to the upside putting you quickly in the money, but it can obviously go the other way too.
  • Second, pigs get slaughtered. When you’re up a lot on a warrant or call option, just get out. I should have sold all my warrants and just bought UNVR’s stock if I thought it was still good (even though in hindsight I know it has underperformed now).
  • Third, don’t be duped by a long time to expiry. “I have so much time until these warrants expire… a lot can happen”. Yes, a lot CAN happen. Including a global pandemic.  I should have instead said, “you know what, I think Nexeo / Univar will build a lot of value over 3 years and I should just ride the equity”

The deal is sealed… what’s next for the securities? $UNVR $NXEO $NXEOW

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Several pieces of news for the Univar and Nexeo… and the warrants.

  • First, the acquisition closed on the 27th. Because Univar closed above ~$22/share, there is no reduction in the exercise price of the warrants
  • Second, there is now more certainty of what the “Merger Consideration” is. We now know that each share of Nexeo will receive $3.02/share (a reduction of $0.27/share). The equity portion is still 0.305 of Univar shares.
    • For the warrants, since each warrant is good for ½ share, this amounts to $1.51 in cash and 0.1525 shares of Univar.  
  • Last, the stock and warrants are delisted from the NASDAQ, which was disclosed previously.

Because there are now less moving pieces, we can clearly arrive at a price target for the warrants. Based on my previous posts, you know that my price target for Univar is ~$32/share in the next 12 months. I think I am being reasonable in this analysis (though I admit, Univar is hosting its 2019 outlook call next week which could change things).

(March 4 Update: UNVR released 2019 guide of ~$750MM of EBITDA, which reflect 10 months of Nexeo and expectations of flat industrial demand. Seems relatively conservative. They also expect to generate $275MM of FCF, which is still a 7% FCF yield. Not too bad, but not amazing either).

It appears that Seth Klarman of Baupost agrees with me as he recently took a big stake in both Univar and Nexeo warrants. Looks like he owns 10MM warrants, or roughly 20% of the outstanding amount. He also owns 9.5MM shares of Univar.

But for now, I will provide this table below to help you decipher what you think the warrants are worth. We can’t forget, however, that we still have 830 days until expiryAs I stated in my article here, if we used Black Sholes to price these warrants, they would be trading much higher just from time value. (Alas, even Buffett has written about the mis-pricing of long-dated options)

What do we do now that the warrants are delisted?

Univar appointed Equiniti as the successor warrant agent pursuant to the Nexeo Warrant Agreement.  This means they will now handle the warrants being exercised. Unfortunately, in the meantime, this means the warrants will be pretty illiquid.  

I will update this post once Equiniti responds.

Update: Equiniti never responded, but the warrants trade regularly now.

Univar to divest Nexeo Plastics; provides updated 2019 guidance. What it means for the stock / warrants $UNVR $NXEO $NXEOW

Reading Time: 2 minutesThis morning, Univar announced earnings and that it was divesting Nexeo plastics. Let’s break down what the divestiture means for Univar stock and the nexeo warrants (Note: the company has not held its call yet, and plans to do in late Tuesday, so items here are subject to change).

First, how good of a price is the sale? Univar is acquiring Nexeo for ~$2BN and had plans to divest plastics. Plastics distribution is a low margin business, based on what management has said.

I am going to assume it generates between 3.5% and 4.0% margins. That implies 6.5% margins for the chemical segment, which is lower than Univar, but makes sense given Nexeo’s smaller scale.

That means the $640MM divestiture implies ~8.6x EBITDA (9.2x if I assume 3.5% margins, 8.1x if I assume 4.0%).

NXEO Segments.PNG

Second, what are the implications on Univar stock? If I subtract my estimate of Nexeo’s plastics EBITDA, I get PF EBITDA of $135MM. Univar is now (unfortunately, this is a big miss from $680MM of expectations from the street) guiding to flat EBITDA for 2019. Then I add in half the total expected synergies ($50MM). The good news is I get $32 Univar stock price.

New Nexeo EBITDA

And the warrants? Well, if you think Univar stock is worth $32 over the next 12 months, that implies $13.05 of “merger consideration” for Nexeo and a warrant value of at lest $0.78, not including any time value. That’s double where they trade as of 2/8/2019…

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

Reading Time: 3 minutesI 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?

Overdue Nexeo Q2’18 Recap. Performance remains strong, yet market hasn’t appreciated it yet. Stock warrants, NXEOW, are my top pick for investors with high risk appetite

Reading Time: 3 minutesI’m a little overdue for a recap on Nexeo’s results. The company reported Q2’18 sales growth of 14% and EBITDA growth of 18%. Most of the growth was in its Chemicals segment, which showed top line growth of 17.5% (though 4.8% of that was from the Ultrachem acquisition) mainly due to higher prices. Plastics was also up 9.6% due to 14% price growth offset by 4% volume decline.

This was a really solid result and if you think about the balance of the year, the performance should continue. The company distributes chemicals and plastics, which in some sense are oil-linked derivatives. Since oil is up considerably year over year, the pricing gains should continue. Importantly, the company benefits most from this inflationary environment, as they buy inventory at a lower price and sell at a higher one.

Indeed, as the economy improves as well, volume growth should continue. I don’t model much in this regard, I’m only at 1-2% over the long term, and this will be upside to my estimates.

The stock is now at $9.13, which means it is only up 8% since I first wrote about it. However, I still think it is a bargain.


I now want to draw your attention to Nexeo’s warrants. In fairness of disclosure, I own a significant amount of these in my PA now, as these are high risk / high reward plays on Nexeo’s stock.

A warrant is essentially the same thing as a call option. I pay a price today to have the option to buy the underlying security in the future at a specified price. If the underlying security ends up being below the threshold at the end of the period, the option expires worthless.

Nexeo’s warrants (Ticker: NXEOW) are just like that. They give the buyer the right, but not the obligation, to buy 1/2 of Nexeo’s stock at a certain price (strike price). Nexeo’s warrants strike price is $11.50.  That’s the price you’ll buy it at, plus you pay the price of the warrant for the option. Here is the language from their 10K on the subject.

“As of December 5, 2017, outstanding warrants to purchase an aggregate of 25,012,500 shares of our common stock became exercisable in accordance with the terms of the warrant agreement governing those securities. These warrants will expire at 5:00 p.m., New York time, on June 9, 2021 or earlier upon redemption or liquidation. The exercise price of these warrants is $5.75 per half share, or $11.50 per one full share, subject to certain adjustments.”

The math looks something like this. Let’s say Nexeo’s stock gets to $15. I then pay $11.50 to exercise the option. That should mean if the warrant gave me the right to buy 1 whole share, that the implied price of the warrant would be $3.50 ($15 – 11.50). Since Nexeo’s warrants give the right to buy 1/2 of a share, you need to divide that by 2, which gives you $1.75.  However, if the warrant stays under $11.50, its implied worth is zero.

NXEO Warrant Math

So, as if this needed to be stated, these are highly risky instruments and warrants can be highly volatile. What I like about them is that we have until June 2021 until they expire. That is a lot of time for Nexeo to build value.

The Company also noted that they would like to take out the warrants, as it makes the capital structure more complex and people worry about dilution (from day 1, I’ve included warrants in my share count using the treasury stock method and based on my target price). Here’s the CEO, David Bradley, on the subject:

“we’re in an active dialogue, have been for a while with our board about the complexity of our capital structure and getting it simplified. Clearly, there’s several opportunities, the primary one probably being the warrants that are outstanding. There’s a lot of those. We hear a lot from investors that, that’s quite a bit of overhang. So we would like to clean those up at some point.”

There has been precedent for tenders of warrants from SPACS, as shown here and here and here for premiums to where they were trading.

I think its a win / win. Either Nexeo tenders the warrants at a premium, or the stock goes up like I suspect and they realize value that way. The warrants are currently trading at less than 60 cents. My updated price target math looks like the below. Sure, in the short term maybe they don’t make as much sense as buying the stock outright. But as investors look out to 2019 and 2020, I think the warrants will be worth much much more.

NXEO Warrant valuation