• 22 Aug 2012 at 4:08 PM
  • M&A

Why Doesn’t Carl Icahn Want CVR Energy Any More?

Carl Icahn’s strangely halfhearted takeover of CVR Energy got even stranger and more halfhearted last night: after acquiring an 82% stake at $30 in a tender offer, and suggesting to the board that they think about selling him the rest of the company at $29, he withdrew that suggestion last night. He gets sort of a sad trombone for this letter:

Gentlemen:*

At the time we made our original offer on August 6th to take CVR Energy private, we stated that we were willing to pay $29.00 per share but in no event would we consider paying more than $30 per share. Since then a number of market conditions have changed, including a significant widening of crack spreads. We no longer think that the proposed transaction is feasible at this time and we hereby withdraw it.

Some background is here.** So this is a neat letter because it sort of sounds like “we no longer think CVR is worth that price” but it surely means “we are not willing to pay the higher price that CVR is now worth and likely to demand” – doesn’t it? Here are CVR’s comps since August 6th:***

Wider crack spreads + the sector trading up = if CVR was worth $29 two weeks ago it’s worth, what, $31 today?**** Or, I mean, you can imagine CVR’s board saying so: “if you were willing to pay $29 two weeks ago why not pay $31 today?” – but it’s weird for Icahn to negotiate himself right out of the deal.

So why did he? There’s a simple boring answer – “he didn’t want to spend more than $30″ – that is unsatisfying: he didn’t want to pay more than $30 when fundamentals were worse, but now that they’re better, he should be willing to pay more, no?

This is particularly true because of the weird structure of Icahn’s deal: he eventually wants to sell the company to someone else, preferably for at least $35. But his tender offer provides that he shares that upside with the tendering shareholders: anyone who tendered in that deal got a “contingent cash payment,” or CCP, giving them the upside in any sale within fifteen months after the tender. Any shares he bought in the open market, before or after his tender, are his alone, so he gets the full upside on those if he can sell for $31 or $35 or whatever. If he can get the 18% of shares still outstanding without giving the shareholders a CCP – even if it means paying $31 or $32 for them – then he gets the upside in those shares too.

So why not push hard to buy those shares, even above $30? Here is a theory that I’m kind of pleased with: Icahn can’t pay more than $30 for the stub because of the way the CCP is written. If he pays above $30 to the holdouts he needs to go back and pay the excess to everyone else too. Here is (part of) what the CCP says:

(a) If the CCP Transaction Date occurs on or before the CCP Deadline, then upon the occurrence of a CCP Payment Event, the Holders shall be entitled to receive, for each CCP, the CCP Payment Amount. …
(v) “CCP Transaction” shall mean a transaction completed pursuant to definitive documents entered into between CVR Energy and all other parties thereto on or prior to 5:00 p.m., New York City time, on the CCP Deadline, pursuant to which (i) CVR Energy consolidates or merges with or into another Person (whether or not CVR Energy is the surviving entity), (ii) another Person (other than the Offeror or its affiliates in the Offer) acquires a majority of the outstanding shares of CVR Common Stock or (iii) CVR Energy sells, assigns, transfers, conveys or otherwise disposes of all or substantially all of the properties and assets of CVR Energy in one or more related transactions; provided that, (A) in the case of each of clauses (i) and (ii), the Stock Transaction Consideration to be paid in such transaction is greater than $30.00 per share of CVR Common Stock and (B) in the case of clause (iii), the Asset Transaction Consideration to be paid in such transaction is greater than $30.00.

So here’s how I read that:

  • If Icahn just buys more stock at $32, no problem – that’s clause (ii) and he’s specifically exempted as “the Offeror”
  • If, however, Icahn completes a merger with CVR – the only way to get rid of the 18% stub entirely – then that would be a triggering “CCP Transaction” above $30 per share under clause (i), and so the CCPs trigger and he has to pay everyone.

And here is how I math that:

Every penny he goes above $30 to get these holdout 15mm shares basically costs him four cents. Oops!

The alternative, of course, is to do nothing – and you can see why that seems to be the way he’s going. If Icahn keeps buying in the open market, he will keep pissing off the holdout shareholders but will not trigger the CCPs, even if he starts paying above $30 per share. And he can afford to wait: if conditions keep improving, he may find a buyer at a price he likes – and if they improve slowly enough, so that it takes him a year or so to find that buyer, he gets to keep all the upside.

Carl Icahn Cancels Offer for Rest of CVR He Hasn’t Already Acquired [Deal Journal]

* One of my very favorite things ever is that as a youngster I once drafted some sort of letter in some sort of businessy situation and opened it “Ladies and Gentlemen.” I sent it to a senior person to review, and he sent back some edits in track changes, and one of them was crossing out “Ladies and.”

** Possibly amusing sideground is here.

*** Here is crack spread, which is more of a mixed bag, though do consider that Icahn launched his $30+ tender in February:

**** I mean, it’s worth $29.59 today or whatever, but you know what I mean. To a bidder, etc.

18 comments (hidden to protect delicate sensibilities)
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Comments (18)

  1. Posted by Guest | August 22, 2012 at 4:22 PM

    So, should I sell my Chicago Rivet and Machine Co or hold it?

    –Guy who would like this post distilled down to simpler terms

  2. Posted by Indigent Insomniac | August 22, 2012 at 4:27 PM

    Why no funny pic tags, and so few words? I made it all the way to the end and I'm only drowsy, not fully conked out, Matt, I am disappoint.

  3. Posted by Dinner Guest | August 22, 2012 at 4:49 PM

    Lee Corso is dropping his bid for CVR? Lolwut

  4. Posted by one | August 22, 2012 at 5:02 PM

    As I get older, my crack spread has been increasing as well.

    - Joe the Plumber

  5. Posted by Guest | August 22, 2012 at 5:04 PM

    Pussy.

    - B. Burrough

  6. Posted by Matt-rimonial | August 22, 2012 at 5:09 PM

    Very original matt-matics. Greatly appreciated. Insight is matt-erial!!

    Guy who doesn't have time to read and ponder; but admires those who do.

  7. Posted by Guest | August 22, 2012 at 5:10 PM

    It's pretty sad when your company name is a 3-letter acronym and you can't even get that as your ticker symbol because of some pissant 18m market cap riveting company.

  8. Posted by Lays Odds on Posts | August 22, 2012 at 5:19 PM

    Anyone think Matt might do a post on this paper about why short selling discourages earnings manipulation? http://papers.ssrn.com/sol3/papers.cfm?abstract_i

  9. Posted by guest | August 22, 2012 at 5:47 PM

    Carl,

    Charts or it didn't happen.

    -CVR Board

  10. Posted by Guest | August 22, 2012 at 7:13 PM

    I'm going to claim that I own a refinery that gets TI from Cushing and spits out RBOB & HO at NYH just to watch Geezer OT's head explode

  11. Posted by B. Icahn | August 22, 2012 at 9:20 PM

    Hey Dad,
    I've got a $3 billion wad burning a hole in my pocket…how 'bout we tag-team this bitch?

    Brett

  12. Posted by tricky | August 22, 2012 at 10:00 PM

    good stuff matt.

  13. Posted by CVR Dir of IR | August 23, 2012 at 8:55 AM

    A 12 P/E and an amply covered 3.25% yield. Kindly go lick a bag of wet rivets.

  14. Posted by Whackattack | August 23, 2012 at 2:55 PM

    Crack spreads are widening? I need to call my broker.

    -B. Brown

  15. Posted by Confused | August 23, 2012 at 4:27 PM

    So I'm supposed to believe Icahn's employees (a.k.a. the CVR Board) are pushing Icahn for a higher price?

  16. Posted by a3986893 | August 23, 2012 at 11:17 PM

    I’ve said that least 3986893 times. SCK was here

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