On March thirteenth, Cummins provides you with $107.53 of worth for each $100 of Cummins inventory. It’s a 7.53% return in lower than a month.
It’s often called an odd lot tender supply and one of many solely methods a smaller investor has a bonus of institutional traders.
However what’s an odd lot tender supply?
A tender supply is a bid to buy a shareholder’s inventory and an odd lot is when you’ve 1 – 99 shares. A spherical lot is when your variety of shares is evenly divisible by 100 – so 100, 200, 300, and many others.
Thus, an odd lot tender supply is when an organization affords to purchase again its personal shares with a separate provision for these with “odd tons,” or lower than 100 shares. These may be known as odd lot buybacks.
Typically, an organization doesn’t make a agency supply however as an alternative conducts a Dutch public sale to ascertain a value. A Dutch public sale is when the worth begins excessive and is lowered till the variety of bids meets the variety of shares the corporate needs to purchase again.
Lastly, an organization solely needs to amass a sure variety of shares. If the supply is oversubscribed, which is when the variety of shares exceeds what the corporate needs, they may pro-rate what number of shares every shareholder can promote. They typically make exceptions to odd tons as a result of they’re so small and that is the place you are available.
I’ve been studying about odd lot tenders for fairly a while, normally as a result of Jonathan at My Cash Weblog writes about them (the most recent includes Cummins and Atmus Filtration), however I’ve by no means participated.
At this time, I simply may.
Desk of Contents
What’s the Cummins & Atmus Filtration Deal?
Cummins (NYSE: CMI) spun off Atmus Filtration (NYSE: ATMU) however nonetheless owns 80% of ATMU’s inventory.
They’d prefer to personal much less, so that they’re providing $107.53 of ATMU for each $100 of CMI inventory. There’s no Dutch public sale on this one, simply a proposal.
The higher restrict is 13.3965 shares of Atmus Widespread Inventory per share of Cummins Widespread Inventory and there’s no decrease restrict (no minimal trade ratio).
Earlier than the market opened on February twenty sixth, Atmus shares had been valued at $22.81 and CMI inventory was valued at $263.97. That’s a ratio of 11.57 so we’re nonetheless underneath the higher restrict.
- What’s the tender supply? Get $107.53 of ATMU for each $100 of CMI
- What’s the higher restrict ratio? 13.3965 shares of ATMU to CMI
- What’s the decrease restrict ratio? No decrease restrict.
- When is the expiration date of the supply? March 13, 2024.
What Are The Advantages?
The advantages are that you simply personal an odd lot, you settle for the tender, and also you obtain $107.53 of ATMU inventory for each $100 of CMI inventory. That’s a 7.53% return in lower than a month.
In the event you purchase 99 shares of CMI at $263.97, that’s a complete worth of $26,133.03. You’ll get ~$28,100.84 of ATMU, for a achieve of $1,967.81.
When you get the CMI inventory, they’re yours to do as you would like. You may promote the shares or maintain onto them.
Since odd tons max out at 99 shares, that is normally enticing to smaller traders or monetary advisors who need to make the most of this arbitrage alternative to offset charges.
What Are The Dangers?
The largest threat, although extraordinarily uncommon, is that the deal is withdrawn or terminated. This hardly ever occurs however is feasible. There are a number of situations during which the supply might fail to undergo. The most certainly (and that is extraordinarily unlikely) one is that if there are usually not sufficient shares being offered again (not sufficient ATMU inventory being offered to CMI). One other one is that if they obtain “an opinion of counsel that the trade supply will qualify for tax-free therapy to Cummins and its collaborating stockholders.” (from their press launch)
If this occurs, the inventory will seemingly go down. A few of the shareholders had been solely proudly owning it for the odd lot tender supply, so these traders will promote their shares.
The deal could possibly be prolonged. The present deadline in March could also be prolonged for no matter purpose and this would scale back the whole return from the deal because the holding interval is elevated.
The following threat is that the respective inventory costs transfer in such a manner that you simply now exceed the higher restrict ratio. In the event you exceed the higher restrict ratio, the quantity of ATMU inventory you get in your CMI inventory will go down. Your 7.53% premium will get smaller.
After that, the subsequent largest threat is that the inventory costs go down after the sale (it most certainly will go down). All these ATMU shares that had been in CMI coffers at the moment are in shareholder fingers. A few of these shareholders had been solely in it for the arbitrage alternative so that they’re promoting the second they get the shares.
The one query is whether or not this strain might be larger than the premium.
What’s good about odd lot tenders is that you simply don’t have to fret in regards to the threat of pro-ration – since odd tons are usually not topic to pro-ration.
How Do You Settle for The Tender Supply?
As a matter of protocol, in the event you personal an odd lot and don’t settle for the tender, you’ve successfully declined it. It’s a voluntary company motion. In the event you miss the discover and don’t reply, you’ve successfully declined it. (company actions which are obligatory are mergers, inventory splits, spin offs, and many others.)
The deadline for the CMI/ATMU supply is March thirteenth however some brokerages might have you to reply forward of that date.
Let’s say you personal an odd lot of an organization that has made an odd lot tender, how do you go about accepting it? This may fluctuate from brokerage to brokerage. Some can have a approach to do it on-line, others would require you to name in.
In Vanguard, there’s Company actions menu in your brokerage account view:
This opens a window the place you’ll be able to reply to Voluntary company actions:
As of this writing I don’t personal any shares of CMI so there aren’t any company actions to point out.
When you settle for the supply, you’ll seemingly get the shares of ATMU about 7 enterprise days after the deadline.
Why Do Firms Do This?
There are numerous causes. For some, they need to scale back the variety of shareholders.
Typically an organization owns a big portion of one other firm, both by spinoff or another motion, and so they need to make the most of it to enhance their share value. In 2023, Johns & Johnson (NYSE: JNJ) spun off its client staples unit, Kenvue (NYSE: KVUE), and held 90% of the corporate. J&J supplied to purchase again its inventory utilizing shares of Kenvue, reasonably than money and did so at a 7.5% premium. For each $100 of JNJ it bought, it might give the shareholder $107.53 in KVUE inventory.
Regardless of the purpose, the beneficiary is you, the smaller investor, as a result of you’ll be able to (probably) earn a fast premium.
