From yesterday's 8-K it sounds like the going private deal is moving forward. They repeat that the $1.75 litigation piece of the payout will be decreased by expenses and fees but they don't say by how much.
One thing from Seeking Alpha that I didn't realize is that apparently the $1.75 litigation settlement piece of the $9.25 total bid is subject to attorney's fees. Seeking Alpha speculates that the fees might be as high as 30% leading to a final amount to be received by unit holders of (1.75 x .7) + 7.50 = 8.725. From Friday's close of 8.38, this would represent an arbitrage premium of 4.1% which is quite a bit less than the 8.5% cited in the headline of the article. If attorney's fees come to 15% then unitholders would get 8.99 which is a 7.2% arbitrage premium.
Assuming that lawyers are awarded 30% of the settlement payment (a very conservative assumption), the per-share payment to unitholders is $8.73. Using the downside price of $4.00, the market is pricing the chance to close to be only 85.4%. With the financing in place and expedited shareholder approval, we think the Parent now has a very good chance to close the deal by late May. If the deal happens at $8.73, the annualized return is 32.6%. If the attorneys are awarded less than 30% of settlement payment, the annualized return is even higher. Therefore, we recommend a long position in NLP.
The only ways that the Parent can terminate the agreement are:
1.By written mutual consent of both parties and Boards
2.If transaction is not completed by September 30, 2014
3.There is a court injunction that is final and nonappealable
4.The court does not grant Final Approval of the Settlement Agreement
5.The Partnership breaches its representations and warranties.
The Parent does not have the right to terminate if it fails to arrange the financing. In fact, according to Section 8.7, if Parent fails to fund the merger, it will be sued for intentional breach of the Agreement and Partnership will enforce the specific terms and provisions ($9.25 per share).
Conditions of the Deal
Prior to the effective time, each party will have to cause the following conditions to be fulfilled to effect the merger.
1.Approval of simple majority shares held by unitholders. Given that Mr. Nichols holds 59.3% voting power, this condition will be fulfilled without any problem.
2.Final Approval of Settlement Agreement. We reasonably believe that $9.25 per share is the best price one could bargain for. Thus, it is likely that no one will file for an appeal on the settlement agreement.
3.No Partnership MAC.
4.No order or injunction that prevents the merger from happening.
The latter two conditions are standard terms in a merger agreement. It is unlikely that the deal will not fulfill these two conditions.
3) Recent conversations with market participants confirmed that financing was an important topic during the negotiation and discovery period given the significant amount of debt and the very high interest rate, and there would not be a settlement agreement if the financing was in question. Remember that lawyers will be paid solely from the settlement payment, so they would be cautious in the negotiation and make sure that the deal closes in order for them to get paid. So, incentives seem to properly align for this transaction to close.
Expected Closing Time
According to the press release, the final settlement hearing is scheduled on April 24, 2014. After the hearing, there is a 30-day period where unitholders can file for an appeal or a motion of re-argument or rehearing. From what we learned, the $9.25 per-share consideration is close to the best price Mr. Nichols is willing to offer. We also believe the plaintiffs are pleased with $9.25, which is a substantial increase from prior levels. Therefore, with all unitholders satisfied, the court is expected to grant the Final Approval in late May. Meanwhile, in lieu of the special shareholder meeting, Mr. Nichols will give a written consent because he has 59.3% of total voting power of the units. With the information statement being sent out in one month, we believe the shareholder approval procedure to conclude prior to the Final Approval.
1) In the previous merger agreement, section 5.10 states all the details of the financing arrangement. In the new merger agreement, by contrast, section 5.10 states that "For the avoidance of doubt, it shall not be a condition to the obligations of the Parent Parties to effect the Merger for the Parent Parties to obtain financing to enable them to make payment of the aggregate Merger Consideration and the Parent Parties' related fees and expenses or any other financing." The new agreement is essentially saying that the deal is not contingent on receiving the financing, hence shareholders do not need to know the details of the financing.
2) In the December press release, the company stated that "The proposed litigation settlement is subject to certain conditions, including…receipt by Merger Sub of financing that is sufficient to pay the merger consideration and related expenses of the transaction." In the press release from February 7th, this financing condition was removed from the conditions to receive the final approval of the settlement. Therefore, I would interpret that the financing of the deal was arranged between December and February.
Background of the Merger
As we predicted in the earlier articles, NTS Realty Holdings terminated the go-private deal last October when the debt financing commitment expired. Back then, NTS Realty Holdings could not close the deal because the financing was conditional on company settling all of its outstanding litigation. As Celeste Hathaway pointed out, Mr. Nichols does have incentives to take the company private in spite of the hefty valuation he may have to pay. Eventually, it seems that the benefits for taking the company private outweigh the costs of settling the case in Mr. Nichols' mind. On December 11th, NTS Realty Holdings announced that it has reached an agreement in principle to settle the lawsuit. On February 5th, NTS Realty Holdings announced primary court approval of the settlement agreement. According to the settlement agreement, each unitholder will receive $9.25 per share minus incentive awards of up to 30% of the settlement proceeds upon the closing of the deal. While the final outcome is still uncertain, comparing the new merger agreement with the old agreement, we find evidence that the deal is likely to happen this time.
Financing of the Merger
Under the previous merger agreement, the financing was provided by a third-party Quince Associates and was conditional on settlement of all of the company's outstanding litigation. Under the new merger agreement, the Parent's representation and warranties regarding financing are "intentionally omitted" in section 4.3. Hence, until we receive the information statement, we will not know the exact arrangement of financing. Nevertheless, we can tell the financing is already in place for the following reasons:
1) In the previous merger agreement, section 5.10 states all the details of the financing arrangement. In the new merger agreement, by contrast, section 5.10 states that "For the avoidance of doubt, it shall not be a condition to the obligations of the Parent Parties to effect the Merger for the Paren
•NTS Realty Holdings' new merger agreement leads to 8.5%-15.0% upside if closed.
•Lack of financing condition and favorable termination clause deserves higher odds to close than the current market price implies.
•The transaction will be processed on an expedited process. We expect the deal to close in late May.
•I recommend a long position in the stock.
NTS Realty Holdings (NLP) announced that it has reached a preliminary settlement with plaintiffs regarding its go-private deal. A conspicuous change in the merger agreement is that the deal is no longer contingent on the Parent obtaining the financing, especially when skeptics considered the company's balance sheet overleveraged. Moreover, the go-private deal will not require a special shareholder meeting, which would result in a faster closing time frame. Last but not least, the termination and the specific performance clauses of the merger agreement make it very difficult for the Parent to exit the deal. As a result, we think there is decent chance that the deal closes by late May. The market incorrectly underestimates the odds of completion because of the recently failed attempt. If the deal closes, shareholders will receive 8.5%-15% gross return and at least 36.2% annualized return.
And you have to wonder if they couldn't get financing at $7.50 why are they going to be able to get financing at $9.25. I'm guessing that a lot of today's sellers were people who were kicking themselves for not getting out in the 7's while the earlier deal was still looking like it might happen. I'm planning on just holding my units - I don't know why but my instinct is that eventually NLP will be sold, I'm guessing for at least $7.50.
The units are up sharply today ($7.10 last I looked) but nowhere near the $9.25 mentioned in the press release. So I guess after the $7.50 bid fell through a couple of months ago there is a lot of skepticism that we will actually get $9.25 for our units. This should be interesting.
I'll bet there a lot of unit holders who had big gains and sold at $5 thinking that with capital gains taxes going up next year they were better off taking $5 now than $5.25 in 2013. I'm glad I held on. Now with the new offer there will be selling pressure for tax reasons keeping a hefty discount to the offer price from now until the end of the year. I'm assuming that any deal will not close in 2012. I still think it's worth holding.
Price of the units traded up to $5.02 at the end of the day. I was wondering why there was such a large arbitrage spread. I think the move from $4.80 to $5.02 came late in the session on small volume so we will have to see what it does next week. $5.25 is $4.6% above today's close. I wouldn't be surprised to see this trade above $5.25 some time in the next several weeks on speculation that the take private offer will get sweetened.
There must have been 4 or 5 law firms that put out press releases saying they were going to "investigate" whether the board is properly exercising its fiduciary duties to public unit holders. A couple of the press releases talk about NLP's common stock. Apparently these "investigations" are in a very preliminary stage if the law firm thinks that NLP has common stock. It doesnt; it has units, because it is a partnership. I know this because I do my own taxes which are made considerably more complicated by having to deal with the K-1 and all the extra entries that entails.
Speaking of which, I wonder if the partnership structure is part of why there is still such a big gap between the offer of $5.25 and today's close of $4.75. That's a 10.5% arbitrage premium if the deal goes through. So part of that 10.5% might be because the deal might not go through, part of it might be because NLP is very illiquid, but part of it might be the partnership aspect and people not wanting to complicate their taxes with a K-1.
The references to "common stock" in the law firms' press releases lead me to believe that they don't necessarily know anything. On the other hand initial offers often get sweetened. The thing that puzzles me is why Nichols felt a need to make this offer - he's been quietly buying units in the open market in the $3's for quite a while, why didn't he just keep doing that? What's the rush?
Sales up a tad, eps down slightly mostly because they spent $550K on a consulting study. I hope they get some value for that. Don't see any reason to sell or any reason to buy more - just sitting here collecting my dividend and hoping for better things as time goes by.
There might be any number of reasons why the stock is falling. In no particular order:
1. Box office this year has been disappointing, off something like 7% year to date.
2. Fear that 3D is just a fad. Fear that customers are less willing to pay up for 3D tickets.
3. Long term prospects of theaters may be hurt by cable and satellite VOD.
4. Theaters are capital intensive. It is expensive to build a new theater or upgrade an existing theater. Owners may not be able to get financing in the current economy.
5. BTN's business is cyclical. After a boom period maybe we are headed towards bust.
6. BTN has a huge exposure to China, which has been adding 3-4 new screens a day but what if there is a hiccup in China's economy.
7. Just the fact that BTN's stock price has been going down. The stock is very volatile, trades huge volumes relative to the size of the company, probably gets traded a lot by momentum players. Right now there have to be lots of holders who bought at >$9 and have lost more than half of their investment. These people are going to be frustrated, angry, disappointed. Plus we're now in the second half of the year and there's likely to be tax selling between now and the end of the year.
The value argument:
6,389,393 shares o/s X $1.39 = $8,881,256 market cap versus $23.072 mil ($3.61 per share) tangible book.
Then look at the property account - 519,000 sf owned at Delphi IN and another 560,000 at Senatobia MS for a total of 1,079,000 sf owned, x let's say market value might be $30 per sf = $32.37 mil, subtract off carried value of $7.036 mil gives extra $25.334 mil of tangible assets for adjusted tangible book of $48.406 mil or $7.58 per share.
So, if co said they were for sale this is a screaming buy.
BUT, co says it is not for sale, has lost money for 5 consecutive years, management is incompetent and unfriendly to shareholders and gives every indication of intending to continue pissing away the assets.
You hafta wonder, why are the owners putting up with this. Let's see, employees own 26.1%, Aldebaron Capital owns 7.4% - how does this BOD manage to get itself reelected??
Bottom line - is CRC an attractive investment? I dunno, looks iffy.
Earnings kinda disappointing. Continued low capex by cable providers. I wonder what to make of this:
"The positive cash flow we are generating in our business has allowed us to build our cash position to $10.2 million at March 31, 2011, up from $3.5 million at March 31, 2010. We anticipate our cash position to continue to increase as a result of our profitable operations and from our continued reduction in the level of inventory. While our inventory will be reduced, we plan on maintaining the inventory on-hand, or available to us via our supply channels, to meet our customers' demands once they increase their capital expenditures. As a result of the strong cash position we have established, we are regularly evaluating strategic ways to leverage our cash reserves in order to support the growth of our business and increase shareholder value," concluded Mr. Chymiak.
Sounds like maybe they are thinking about making an acquisition.