Special Situation: Ecolab / Apergy (ChampionX) Share Exchange
Recommendation: Buy 99 shares of ECL and short 2,442 shares of APY
June 1, 2020
ECL: $212.58
Market Cap: $61.5BN
Enterprise Value: $67.6BN
APY: $9.07
Market Cap: $705MM
Enterprise Value: $1.2BN
Expected return: 5.38% / $1,135
Recommendation
I’m recommending buying 99 shares of ECL and tendering them today and simultaneously shorting 2,442 shares of APY.
This works out to a profit of 5.38% and $1,135 in ~2 weeks. See the math below.
Here is my spreadsheet which you can use to monitor the expected return.
This morning, Ecolab confirmed the exchange is on and set the final exchange ratio of 24.6667 shares of APY for each share of ECL.
Last week, I published an overview of the situation which you can access here.
Because Ecolab has confirmed the exchange ratio and hasn’t removed the odd lot provision, all risks that I can think of have been removed. Of course, perhaps there is a risk that I’m overlooking.
I personally am proceeding with the trade because I was able to short APY to hedge the transaction. If you do not want to (or cannot) short APY you could just buy ECL and exchange the shares for APY. However, you would be vulnerable to APY shares selling off while you are waiting to receive them. Of course, APY shares could appreciate as well.
One last note. If you do proceed with the trade, I would recommend calling your broker after you’ve bought ECL shares to confirm that they will proceed with the exchange on your behalf. Today is that last day that investors will be able to proceed with the exchange according to Schwab.
Disclosure
Rich Howe, owner of Stock Spin-off Investing (“SSOI”), is short APY and plans to buy ECL today. All expressions of opinion are subject to change without notice. This article is provided for informational purposes. Please do your own due diligence and consult with an investment adviser before buying or selling any stock mentioned on www.stockspinoffinvesting.com.
Thanks Rich,
I was able to do the same trade after verifying I could short APY to lock in the gains. Thanks for finding this.
Thanks, Ram. In hindsight it would have been smarter to not short APY (as it has been strong) but it’s worth it to have the peace of mind, in my opinion.
Because of some volatile price movements from May 10th on I was able to enter into and close out this hedge twice with $1200 profit each and then enter a third time for the final exchange. As the short proceeds exceeded the purchase cost, I used margin and was able to enter each trade at no cost except margin interest costs. Thanks for alerting me of the opportunity to study it out and take advantage of the situation.
Nice Jim! You are smarter than me!
I should have done the same. I waited until the end to put on the trade. Seems to me that it always makes sense to buy the parent (in this case Ecolab) as soon as possible once the transaction is announced. I’m just going from memory but it seems like the parent performs well in the month following the announcement on a relative and absolute basis. I will study and publish something.
Got my shares after Friday close. Closed out Monday morning after playing around a bit with CHX going long.