XBiotech Odd Lot Tender Offer – $470 Potential Profit
February 6, 2020
Ticker: XBIT
Price: $21.76
Market Cap: $894MM
Enterprise Value: $190MM
Overview
On January 14, 2020, XBIT announced that it is commencing a tender offer to purchase up to $420MM of its shares for up to $30 to $33 per share. It is funding this purchase with proceeds from the sale of one of its drugs to JNJ.
The stock is trading at a significant discount to the minimum tender price of $30 because the tender offer will be heavily oversubscribed.
However, a provision in the tender offer discloses that odd lot shareholders (shareholders owning fewer than 100 shares) will not be prorated.
Thus, there is the opportunity to buy 99 shares today at $21.76 and tender them to XBIT at $30 per share for a gross profit of $815.76. Proceeds will be less after factoring in withholding taxes (more on that below).
What’s the Catch?
There are two risks.
First, the “odd lot” provision could be removed in which case our tender attempt would be significantly prorated. If this were to occur, we would probably only be able to tender 33 shares (assuming only 34% of shares are accepted) at $30. We would have to sell our remaining 67 shares at whatever the market price is after the tender offer is complete. My best guess (but it is a guess) is that shares will trade in the low teens, slightly above the value of XBIT’s pro forma net cash on its balance sheet ($10.52). In this scenario (where the odd lot provision gets removed), this trade will lose money.
Second, the tax situation is a little confusing. The tender document states that Canadian tax authorities will consider anyone who participates in the tender offer to have received a taxable dividend on any proceeds that exceed paid up capital (paid up capital is C$8.86 or USD$6.65 assuming a 0.75 USD to CAD exchange rate). The dividend will be subject to a 25% withholding tax (or 15% for US residents). I’m a U.S. resident and so here’s how I’m thinking about potential withholding tax. I will receive $30 per share, but $3.50 will be withheld for taxes (($30-$6.65)*15%). So instead of receiving $30 per share, I will receive $26.50 per share. However, my expected profit is still attractive. I will buy 99 shares at $21.76 and sell them for net proceeds of $26.50, yielding a $469 profit. I also believe that any taxes withheld will offset US tax liabilities as the US and Canada have a tax treaty. Remember, I’m not a tax advisor so my analysis could be wrong!
My Thoughts
While there is a risk that the odd lot provision gets removed, it’s encouraging that it hasn’t been modified and we are getting close to the tender deadline (Weds, Feb 12th). I also do not get the sense that too many people have rushed into the trade. There is a lot of confusion related to potential taxes. Just look at the comments/questions in this Seeking Alpha article. If too many small shareholders rush into the trade, it would increase the chances that the odd lot provision is removed.
I think much of the trading volume since the tender offer has been announced relates to shareholders who are selling some of their shares at a profit as they know that the stock will drop significantly once the tender offer is complete.
In summary, I will be buying 99 shares of XBIT tomorrow (2/7/2020) or on Monday (2/10/2020). I will then call my broker (Schwab) and let them know that I would like to tender all of my shares at $30.
The deadline to tender your shares is Weds, Feb 12th, but I would buy shares on Feb 10th at the latest as it can take a few days for a trade to clear.
I would expect for the tender to be complete and to receive $30 per share from XBIT within two weeks from the Feb 12th deadline (by Feb 26th).
Good luck and comment below if you have any questions.
Disclosure
Rich Howe, owner of Stock Spin-off Investing (“SSOI”), intends to buy 99 shares of XBIT. 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.
Rookie question here… If the tender offer is to purchase up to $420MM of its shares for up to $30 to $33 per share, what is the rationale for tendering your shares at $30 vs. $33 or something in the middle?
Mark,
The deal that is being pursued here is very specific: the tender offer guarantees that odd lots tendered (an odd lot is below 100 shares) will be purchased, first. So, “$30” minimum, guaranteed. The tender offer will be over-subscribed, so the number of shares that will be bought from larger shareholders will be much less that what is tendered. If odd lots were to “use up” the entire $420MM, then the larger lots will not get bought at all, for example.
The reason to “buy out” odd lot holders is to reduce the shareholder count to the point where the company can delist, possibly, and delisted companies’ stock values drop. Then buying out medium sized holders becomes much easier in a “going private” transaction.
Yes exactly Robert.
Basically, $30 is such a premium to where the stock was trading prior to offer that I recommended tendering at the minimum tender price to guarantee that your tender gets accepted.
Anyone have any trouble tendering this week? I had to make call to tender Tuesday AM before market open because Schwab’s deadline was 7pm Monday night, I guess. Hard to know that since they didn’t tell me over the weekend and I bought on Friday!
I had trouble too, Robert. I called Schwab to tender on Monday. They said that their internal deadline for the tender offer was Monday, two days prior to XBIT’s deadline (Weds). Schwab said that because my trade hadn’t settled (it takes T + 2 days), they couldn’t guarantee that they would be able to process my request. At the time, they processed my request on a “best efforts basis”, but subsequently (on Weds), Schwab confirmed that they had processed my request to the company. In hindsight, I should have recommended purchasing shares last Thursday (2/6) at the latest as the trade would have settled by 2/10, Schwab’s internal deadline. Lesson learned for the next odd lot opportunity.
@Robert and @Rich. Got it, that makes sense. Thank you. I assumed it was to increase the chances that your tender is actually accepted.
Received a payout this morning from Fidelity… of only $6.38 per share (the paid up capital). I’ll be calling them later this morning but it seems unusual to break up the payout like this. Either that or my ‘no bid’ tender truly was a no bid, contrary to what the agent told me (a no bid is the same as a $30 bid, which is the lower range of the offer).
To clarify here – my original tender instructions to tender at $30 were not properly received – and resulted in a ‘no bid’ tender. I called and was assured that this was the same as a $30 bid. If I wanted to tender at $31 instead for example, then the instructions would need to be redone but in this case since I wanted the $30 bid I decided to trust the guy and let it run.
Called Fidelity – apparently XBIT is doing this in a 2-part payment. Anyone else seeing the 99*$6.38 paid out first?
Thanks for sharing Kevin. I haven’t received anything yet (I have Schwab).
Yes, this is what I see in my transactions log from TD Ameritrade…
Date: 02/20/2020
Description: Sold 99 @ 6.38
Amount: +631.62
Date: 02/11/2020
Description: Bought 99 XBIT @ 22.09
Amount: -$2,186.91
Per TD Ameritrade, they are doing it in 3 payments…
1st payment: Paid-up capital: 6.38
2nd payment: part of the dividend today
3rd payment: remainder paid out on Monday
Thanks for sharing Mark. As I discussed on the call this morning, I received two separate deposits in my Schwab account related to the XBIT exchange offer. The first was for $631.62 which represents “paid up capital” of $6.38 (which was not taxed). The second was for $1,753.79 which works out to ($30 – $6.38) x (1-25%) x (99 shares). I hope to receive another payment on Monday. I heard that someone with a JP Morgan account has received the full $26.46 per share. Fingers crossed the remainder gets us above $26.
I have Schwab too. Bought 99 shares @ $21.72 = $2150.28 and received two separate deposits (as of today, 2/21). The first was for $592.62, which i’m assuming is the paid up capital and then another for $1753.79 for a total of $2346.41. I also had a no bid tender if that made a difference.
More perplexing is why there is a Phillies logo as my avatar haha
lol! not sure…
Ok thanks for the update. Fingers crossed there is another payout on Monday.
Joseph
You had a $30 transaction fee (normal amount) subtracted from your first distribution.
I have Merrill Lynch. Received $631.62 on Thursday but not the second part as of Saturday morning. Will call on Tuesday if not. My son has Schwab and he received both parts Thursday with 25% withholding.
Since we can claim the withholding on our 1040’s (Form 1116) against our US income tax, the withholding should be considered as profit also.
I just talked to Schwab. They said I’m going to receive another payment that will get me to $30 per share (no withholding). I will believe it when I see it, but the Schwab representative seemed to believe it was likely to take place within a couple days.
Merrill issued payment today. All in all, subtracting fees ($30) and correctly counting the withholding (15%) which decreases my US income tax payable as part of the profit, it was a 37.5% return in just over 2 weeks.
I also a line item for “Foreign Tax Paid”. I’m not an accountant, but it appears we may be able to claim this tax paid as a credit on our own taxes for this transaction: https://www.investopedia.com/articles/personal-finance/012214/understanding-taxation-foreign-investments.asp#citation-11
I got the $30/sh total in my IRA account. DId not see any foreign tax transactions, either.
great!