On Friday, September 30th, The Procter & Gamble Company announced the preliminary results of its tender offer in connection with the spinoff of the P&G Beauty brands to Coty, Inc. I previously wrote one article about participating in the tender offer through an odd-lot preference and a second article focused on the valuation of Coty, Inc. following the transaction.
Now that the transaction is complete, this article will a) examine the actual versus headline return arising from the tender and b) take a first look at trading in the shares of post-transaction Coty, Inc.
The Transaction and Odd-Lot Shareholders
In its Friday announcement, P&G disclosed that the tender offer was over-subscribed by 6.6 times, with 691,105,648 total shares tendered against the 104,969,205 allotment the company set aside for the transaction. As such, investors who tendered were pro-rated considerably and only approximately 15.2% of shares tendered were accepted.
Smaller shareholders who participated in the transaction via the odd-lot tender discussed here were not pro-rated and received a full allocation of Coty, Inc. shares. The company reports 1,488,679 such shares were tendered via the odd-lot preference.
The company set the terms of the tender offer to generate a return of approximately 7.5% for those participating in the transaction by offering $1.075 worth of Coty stock for every $1.00 of P&G stock tendered. The formula for the exchange that was supposed to generate this return had a so-called upper limit feature used to maintain the exchange ratio within a band that would satisfy both valuation and post-transaction ownership levels for tax purposes. As Coty’s share price declined by approximately 15% in the weeks leading up to the closing, the upper limit kicked in and the final exchange ratio of COTY shares to PG shares was limited to 3.9033, thereby reducing the return.
So what was the return? An investor’s actual return from this transaction depends on what that investor paid for the P&G shares exchanged. For example, P&G’s stock price ranged between $86.24 and $88.99 between September 1st (commencement of the offer) and late September (an investor would have had to buy shares at least a few days before the September 29th deadline to participate in the offer).
Coty, Inc. Developments
Following the closing, Coty received a debt rating of Ba1, one notch below investment grade, from Moody’s for its senior secured credit facilities. Coty also received recent equity upgrade from BofA/Merrill introducing a $28.00 price target and citing valuation and the PG transaction as the catalyst.
Impact on P&G
Due to the popularity of the transaction, no shares will be distributed to P&G shareholders who did not tender.
In the prospectus filed September 1 at commencement of the tender, P&G stated «Based on the closing price of Coty common stock on August 17, 2016 of $27.71, which is above the collar, the total transaction price is expected to be $13.2 billion. This is comprised of $11.4 billion in equity and an estimated debt amount of $1.8 billion»
In its September 29th press release, the company provides an update, noting «The combination of the stock retirement and debt proceeds results in a total value of approximately $11.4 billion.»
The difference, nearly $2B, is attributable to the move down in Coty, Inc, stock leading up the transaction.
For its part, although transaction value was less than expected, P&G and its shareholders received the following:
* Payment of the $1.9B Recapitalization Amount (funded by the debt Coty, Inc, incurred in connection with the transaction)
* The retirement of 105M of 2.68B shares outstanding, or about 4%
* Increased Management focus on higher growth and more desirable core P&G businesses
Participating in the PG / COTY tender offer via an odd-lot preference strategy allowed those investors to receive a full 100% allocation of exchange stock in a popular deal that was 6.6x oversubscribed and limited to about a 15% allocation for non odd-lot shareholders. Of course, the odd-lot preference limits investors to 99 shares (or about $9,000 of principal in this particular case) and so is not a suitable strategy for existing investors who hold more than that amount. However, in a near zero-yield environment, investors with excess cash may find it useful to understand the mechanics of such transactions in consideration of future participation.
And of course it should be noted that the COTY exchange stock received in connection with the offering will not be tradeable for about a week or so following completion of the transaction, thereby introducing additional market and other risk from being long COTY.
Fuente: Seeking Alpha
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