Three months ago, Yuanxi Zhang wrote an Alpha-Rich article arguing that WSP Holdings (WH) would be a timely short candidate, and he proved to be right. The shares were at the time trading relative close to the going private price of $3.20/share while there were legitimate concerns about whether or not the deal would go through. Since then the share price has gone down, the acquirer has reconfirmed his intention to take the business private and the delayed annual report has been filed last week. The lower price with the reduced uncertainty make WSP Holdings an attractive merger-arbitrage play. The shares are currently trading at $2.77, and after a $0.05/share ADS cancellation fee, this risk arbitrage offers an absolute return of 14% in less than two months time.
Part of the reason for the big spread between the current market price and the offer price is that the going private transaction has been in the works for a long time. The initial non-binding going private proposal was received almost two years ago at the end of 2011. The company then remained quiet until February this year when the definitive merger agreement was signed. The deal was originally scheduled to be completed in the second quarter of this year, but the deadline has now been extended to the fourth quarter.
This is a very significant event, because it removes a lot of doubt about whether or not the acquiring party (HDS) is still interested in buying WSP Holdings. The acquiring party could have terminated the merger agreement without paying a breakup fee after the original merger deadline of August 21. The only reason to continue with the process at this point is if you are in fact interested in buying the company! Shareholders have traveled on a rocky road:
(click to enlarge)
The reason for the delay was the inability of the company to file their annual report on Form 20-F in a timely manner, preventing WSP from finalizing the proxy statement for the extraordinary general meeting of shareholders. Last week, the annual report was filed on Form 20-F, and since then WSP Holdings has filed two amended Form SC 13E3's with the SEC. The new filings incorporate the data from the latest annual report, provide some background on the delay and in it the company reconfirms its intention to complete the deal this year (emphasis mine):
On August 14, 2013, immediately after the Company's quarterly board meeting, the members of the Special Committee convened a telephonic meeting, attended by Kirkland & Ellis, to discuss the extension of the termination date under the merger agreement. The Special Committee considered with Kirkland & Ellis the potential benefits and risks of the extension. During the discussions, the Special Committee noted that, based upon the update it received regarding the business of the Company during the quarterly board meeting and their knowledge of the Company's business and industry, the Special Committee (I) did not believe that there had been any material changes in the Company's operations, performance or in any of the projections or assumptions upon which Houlihan Lokey based its opinion since the delivery of the opinion on February 21, 2013, (ii) did not anticipate any such material changes to occur before a meeting of security holders is held to consider and approve the merger, (III) believed that the factors supporting the decision of the board of directors to approve the merger in February 2013 remained unchanged, and (iv) believed that the other premises and benefits of the merger remained valid. As such, the Special Committee determined that it was in the best interests of the Company and its unaffiliated securityholders to extend the termination date to allow the Company sufficient time to obtain the requisite shareholder approval prior to the extended termination date.
With the proxy statement now updated, there stands very little in the way of a successful completion of the going private transaction. The 2012 annual report was the major roadblock, and that has been lifted. The shareholder vote itself is a formality with the rollover shareholders owning 74% of the shares, and since the company is based in the Cayman Islands there is no majority of minority provision. Financing is also not a risk since HDS is financing the deal using its own funds.
Timing of the transaction
I believe WSP Holdings could file a definitive proxy statement any day now, and the deal will most likely be completed by the end of this year. After the filing of the annual report, two amended proxy statements have been filed. The first one provided updated financials and background on the delay, as required, and the second one puts on the finishing touches and contains only minor textual fixes. In both filings, WSP writes that the target closing date of the deal is still in Q4 2013. The only thing left to do now is set a date for the shareholder meeting, and consummate the deal. That should be doable before the end of the year.
Having said that: it is possible that the deal with be delayed a bit further. When the merger deadline was extended in August to 31 December, the company expected to have the 2012 annual report ready in October, and that eventually became mid-November. So it is possible that the current schedule is a bit too tight. Given the high absolute spread between the share price and the deal price, a delay isn't going to kill the attractiveness of the annualized return, and I don't think a possible delay will kill the deal. If HDS didn't want to go through with the deal, it could already have exited without a breakup fee, and the 2012 annual report reveals that there are no significant changes in the financials of the company. There is absolutely no reason for them to suddenly change their mind.
A final note on why the opportunity exists
The opportunity to earn an attractive absolute return most likely exists because WSP Holdings is small and underfollowed, existing shareholders have had their confidence shaken because of the delays and few investors even want to look at a merger arbitrage deal in China. This despite the fact that WSP Holdings has significant assets outside China, the largest outside shareholder is retaining their stake, and usually the only reason to initiate a going private process is when you do in fact want to buy the business. Otherwise, you would just be wasting a ton of money on outside legal and financial advisors without any real gain.
Disclosure: I am long WH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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