XBiotech Odd Lot Tender Offer – $470 Potential Profit
February 6, 2020
Market Cap: $894MM
Enterprise Value: $190MM
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!
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.
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.