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Disclosure: No position in FSIC. This post has been edited to remove details of trading activity. This post is intended to follow up on prior analysis and should under no circumstances be considered an advertisement for the performance of past specific recommendations.
I wanted to share the outcome of another special situation which provides some thoughts on how to identify future similar opportunities. (Also, I realize I’ve been writing a lot about tender offers lately, but it’s a consequence of them being relatively easy to discuss in full. I’m a little bit reluctant to describe my core portfolio investments without presenting an exhaustive, detailed rationale for the position. I haven’t had time to do them justice in writing yet!)
I closed a post about a tender offer last month by saying, and I apologize for quoting myself, “…it would have been possible to accumulate and successfully tender a lot more than 99 shares. Food for thought.” In truth I was thinking of a particular opportunity at that moment. FS Investment Corporation (FSIC) had an ongoing tender offer that I did not wish to publicize, as more participants would increase the odds of proration. I believed that the tender was unlikely to be significantly prorated, despite occurring at a significant premium. A holder could potential tender large amounts of stock at a premium, without worrying about a potential decline in price afterwards. FSIC was conducting a Dutch auction between $10.35 and $11.00, while trading around $10.15, well below its net asset value of $10.27. The tender closed on May 28th, and sure enough, the company bought back 96% of tendered shares at $10.75.
It remains quite difficult to predict with certainty when a tender offer will not be oversubscribed, but there are certain characteristics that make it more likely, one of which is of course that there aren’t a bunch of blog posts talking about how great it would be to participate in the tender. There were several other factors that made FSIC an attractive candidate, however:
- FSIC was a newly public listing of a previously OTC entity with a largely retail shareholder base (tax sensitive and generally less likely to tender)
- The offer was large relative to the market cap
- The company had had an ongoing tender offer policy to provide shareholders with liquidity, and previous offers were recent and under-subscribed near the low end of the Dutch auction range
- FSIC is broadly diversified and traded below NAV, making it a relatively low-risk short term holding
- FSIC announced special dividends later in the year for continuing shareholders
- The minimum increment in the Dutch auction was relatively small ($0.05), making for a smoother supply curve and potentially less proration at any given point
In short, FSIC was an unusually good setup for a tender offer, and based on the size of the offer, it was highly scalable too. I estimate it could have contributed meaningfully to funds as large as $200 million AUM. Such opportunities do not come along very often!