Thursday, October 27, 2011

One for the Little Guys?

A common refrain from many individual investors is that the “markets are rigged” or “there is no way to beat the professionals so why even try.”

However, I learned about an investment opportunity two weeks ago that only a small fry investor like me could fully take advantage of. It all started when my brother-in-law, who works for one of the premier option market makers, received a firm-wide email alerting him to an opportunity in Norilsk Nickel. Norilsk is a $40 billion market cap Russian-based metals and mining Company.

The email indicated that Norilsk (ticker NILSY on the pink sheets) was conducting a tender offer for approximately 7.7% of its shares at a substantial premium to its then current trading price of approximately $20 share. More specifically, the tender offer price is $30.60/share, representing a 50+% premium. While not unusual in its own right, the fascinating part of the tender offer is that individual shareholders who own less than 1,000 shares will not be prorated in the tender. As such, assuming the Company follows through on the tender, an investor could pocket approximately $10,000 in less than two weeks time just buy tendering their shares!

For a large institution holding several hundred thousand shares, this offer hardly seems that appealing. While they will likely be able to tender a small portion of their shares (perhaps ~5%), the vast majority of their position will not be accepted and as such they have to be primarily focused on the fair value of the Company (which presumably is around $20/share). Given that most of Norilsk shares are held by very large shareholders, the Company’s share price has hardly moved since the tender was announced, despite the fact that the offer contemplates a 50% premium to the pre-tender price!

Ever the opportunist, and recognizing a compelling risk/reward when I see it, I purchased approximately 1,000 shares in three separate trading accounts. Tomorrow is the day of reckoning as the Company will officially close the tender and presumably announce the results thereafter. As I see it, the key risks are the following:

  • The Company decides at the last minute to pull or delay the tender

  • The Company lowers the offer price, since they see no reason to reward mostly individual shareholders with a 50% premium

  • So many small shareholders pile into the trade that even the non-prorated class ends up getting prorated (i.e. not all of my 3,000 shares are accepted for tender)

  • The government challenges the tender (this is a separate issue that is not worth going into in this email – safe to say, this issue has likely been taken off the table given recent comments from the Russian government)

While there is a distinct possibility the tender offer fails to go through, I still think this is an incredibly attractive risk reward that frankly I have not seen available in a very long time. In a worst case scenario, the tender offer is pulled and I end up owning stock in a $40 billion Russian metals Company.

While not my intention to be long NILSY, most of the more bearish analysts think the stock is worth $18. In a worst case scenario, assuming it trades down to this more pessimistic view of fair value, my maximum short-term paper loss would be $7,500 [(my purchase price of $20.50 - $18.00) * 3000 shares]. My upside, assuming the tender is accepted is $30,300 [ ($30.60 - $20.50) * 3000 shares]. If you assume there is an 80% chance of the tender going through, that provides an expected value payoff of $22,740 (.8* $30,300 + .2 * -7,500). Certainly not fool proof, but a compelling risk-reward in my play book.

I look forward to reporting back on the results of the tender! Knowing my luck, something bad will happen between now and tomorrow, but given the massive run in the market today, I feel even better about my downside.

For those interested in reading more about the tender offer, please follow this link: