Tag: warrants

$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”

$NXEOW: The Forgotten Time Value

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$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.

UNVR Reduction

Here’s an example:

UNVR Sensitivity 1

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:

UNVR Sensitivity 2

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!

UNVR 3

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!

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

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I’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.

Warrants:

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