$NXEOW: The Forgotten Time Value

Following my last post on Univar’s acquisition of Nexeo, I wanted to provide a follow-up on the warrants. After confirming that the warrants will remain outstanding until June 9, 2021, I now think the warrants are even more compelling.

For one, we are much more tied to Univar, a larger more diversified company, given the take-out price of Nexeo is based on $3.29 of cash and .305 of UNVR stock. Just so everyone is on the same page, I’d like to provide a sensitivity below on what the outcome is for the Nexeo warrants (ticker NXEOW) based on different outcomes.

One factor to point out is that the cash portion of the deal moves as Univar’s stock moves below $25.34. The reduction is a maximum of $0.41. The reason for that is that Univar doesn’t want the cash portion of the deal to exceed 70% of the transaction consideration, as that would lower the strike price on the warrants.

Here’s an example:

Now that we have that moving mechanism established, we can sensitize what the intrinsic value of NXEOW is based on the movement in UNVR’s stock price. The instrinsic value should be derived by taking the total consideration for Nexeo and subtracting the strike price. The stock portion of UNVR is based on 0.305 * UNVR’s stock price, just as a reminder. We must then divide by 2, given each warrant is for one-half share.

The results are shown below:

The risk here is that UNVR trades to $26.5 or below, as the warrants would have an intrinsic value of zero…

But wait, aren’t we forgetting about time value??

Yes – that’s the factor not mentioned so far.  Warrants are essentially long-dated call options and the cost of a call option is essentially the intrinsic value +  time value remaining on the call. This is why further dated call options (typically only 6 months out) are more expensive than near dated ones — you need to account for additional time and, pardon the pun, optionality.

Let’s take a look at UNVR’s calls to get a better picture on what time value is embedded. The latest dated calls are March 15, 2019. The call with a strike price of $25 would currently have intrinsic value of $4.43, shown below. The call is trading for $5.90 however, which implies $1.07 of time value. That is time value for 177 days away! We have 994 days for the warrants!

I’m no expert in determining the remaining time value that should be built into the warrants, but I do know one thing… these warrants, even at $0.80, do not account for much time value. 

As such, I am sticking with them!