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:
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.
* 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.