The Atlas Corp Special Situation
Brief comments on risk/reward after the buyout proposal
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I received a number of reader comments/questions on the Atlas Corp (ATCO) special situation, with most of them relating it to the MLP buyouts (SRLP, BKEP, SIRE) that I have commented on or written about.
You can find my post on SIRE here. My earlier letters to BKEP’s conflicts committee are the first two posts on this site.
Atlas Corp:
Atlas Corp. (NYSE: ATCO) is a leading global asset management company, differentiated by its position as a best-in-class owner and operator with a focus on deploying capital to create sustainable shareholder value. Atlas brings together an experienced asset management team with deep operational and capital allocation experience. We target long-term, risk adjusted returns across high quality infrastructure assets in the maritime sector, energy sector and other infrastructure verticals. Our two main portfolio companies, Seaspan Corporation and APR Energy Limited are unique, industry-leading operating platforms in the global maritime and energy spaces, respectively.
Situation:
A majority shareholder group has made a non-binding offer to acquire the remaining outstanding shares of Atlas Corp for $14.45/share. The full statement can be found here.
Yesterday, Atlas Corp shareholder Charles Frischer made a compelling case that the initial offer severely undervalues the company via a letter to the special committee evaluating the transaction which was made public yesterday.
Given the above, it seems probable that at a minimum we will see some type of bump to the initial proposal.
My take
Playing this for a moderate bump looks like a reasonable trade - particularly when the share price is under the initial proposal level of $14.45.
There are two big advantages over the recent MLP buyout proposals:
Any deal will require the majority of minority shareholders to vote in it’s favor - this is a substantial shareholder protection.
The timeline is expedited. The proposal states that that the consortium has a, “goal of entering into a binding definitive agreement within two to three weeks” of the conflict comittee’s engagement.
This rapid timeline creates the potential for a very high IRR (Internal Rate of Return).
However, I see increased risk of a “no deal” situation relative to the recent MLP take-privates. With the ATCO proposal, the buyer group is 100% financially minded, highly sophisticated and acting opportunistically, whereas the MLP take-privates were/are strategic acquirers eliminating a nuisance security.
I have zero doubt that this buyer group will cancel the proposal if they are unable to secure a bargain valuation.
In my view, the best opportunity right now is for those who see the potential for a high IRR trade, yet would otherwise be interested in owning ATCO shares as a long-term investment.
The take-private offer is a strong signal that ATCO’s public shares are undervalued.
Buying in at a level less than what highly sophisticated, informed investors (Such as David Sokol, who built Berkshire Hathaway’s Energy business) are willing to pay seems like a sensible starting point. I only started reviewing the company yesterday and have not yet drawn an independant conclusion.
As a pure trade, the potential math is compelling given the compressed time horizon.
Let's say:
There is a 70% chance to make $2.35 (from the current price of $14.05)
A 30% chance of losing $2.35 (loss on no deal from current price)
The formal offer is made in two weeks
The expected value here would be $.94, or a 6.7% expected gain. I am not going to compute the annualized return on this, but it is astronomical - clearly worthwhile for any trader who thinks the odds and timeline are roughly in line with my hypothetical example.
Disclosure: No position in ATCO
My newsletter focuses on less known, undervalued securities with upside potential and a margin of safety. My last writeup: “Inflation resistant, 100% ROIC small cap with EPS tailwinds” can be found here.
Future content on deck:
Under-the-radar micro-cap with the potential to become a “Peter Lynch” style growth story. The new CEO’s turn around plan is working - store growth is on the verge of turning positive for the first time in a long time - massive same-store sales improvement should create enormous operating leverage. If the strategy continues to work, this name has multi-bagger (10X) potential.
Activist situation in a micro-cap medical stock. High margin product would be much more valuable to an industy leader with a large sales force, which an existing activist shareholder is likely to push for. Large insider ownership. While the company has substantial potential to build value on its own, I predict a sale within two years, which could generate +100% gains.
Conservatively capitalized, cash flowing energy company trading at a severe discount to fair value and *not* getting killed by hedges - management has been buying back shares hand-over-fist, with an eventual full sale of the company likely at some point.
An ultra stable growth stock that has traded poorly due to a number of investor concerns - I think the market is reading the situation wrong. In addition to substantial undervaluation, I see potential for a near-term catalyst that could rocket the stock higher if it were to play out.
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