ATCOL - Atlas Corp. Is Being Taken Out On The Cheap

Summary

• Atlas Corp. is being acquired by a consortium led by famous value-investing people.
• They are arguably buying it on the cheap after a small bump at $15.50.
• It is always better to be in mergers where the company is being taken out cheaply by savvy value investors.
• If the deal breaks, you are more likely to be still in a solid situation.
• The merger spread isn't large enough for my liking, but the illiquid option chain seems interesting.

Atlas Corp. ( ATCO ) has entered into an agreement to be acquired by the Poseidon Consortium, including former Chairman David Sokol. Sokol is also a former Berkshire ( BRK.A , BRK.B ) employee and has an in-depth understanding of concepts like "value" and buying with a "margin of safety." The definitive agreement came after an initial offer was bumped 7.3% to $15.50. The bump came on Nov 1 2022 the first bid for $14.45 cash per share on Aug 5, 2022. Fairfax Financial (FRFHF), the Washington Family, and David L. Sokol own/control nearly 70% of the Atlas shares already and are rolling these over into the deal.

An important detail is that the company pays a $0.12 quarterly dividend. My understanding is that shareholders get a prorated portion of that quarterly dividend no matter what day of the quarter the deal actually closes. This prevents "unlucky" timing where the deal closes right before the record date.

The spread is not very wide, but there is nonetheless a $0.17 upside to the deal price of $15.50 and likely a portion of the $0.12 quarterly dividend. The upside to the deal price is around ~1%, while there is 1.9% upside to the deal price + a full quarterly dividend.

The merger is slightly contentious, with some shareholders arguing the company is being taken private at too cheap a valuation. There will be a vote of the minority shareholders (without the parties rolling over their stakes), and if a majority of that minority votes against, the merger is off. One investor, and fellow Seeking Alpha author Chris DeMuth, seems to oppose the deal at this price. Chris usually makes a lot of sense, and I recommend checking out what he wrote about this deal.

Shareholders opposing the deal may rightfully want a price improvement here. However, as the recent TRQ deal proves this isn't always achieved. I wrote about the TRQ deal here . I pulled up a shareholder list put together by Morningstar. The buying shareholders list includes a lot of hedge funds with strong reputations. Including hedge funds with a history of fighting hard to improve deals when companies are being taken private. However, it also includes a number of funds I'd qualify as quant funds. The latter is much less likely to vote against the deal or be considered a credible threat to the deal.

ATCO traded at around $11 at the time of the deal. ATCO is more than just a container company, but it is ~2/3rd of earnings last quarter. Another important component is APR energy, which operates a mobile fleet of gas turbines that generate energy. It is good for ~1/3rd of earnings in the last quarter. I pulled up a number of container peers, and these have been hurt fairly bad since the deal has been announced.

Atlas Corp. is actually the only company that held up well. It seems unlikely to me that this deal ultimately doesn't close. The shareholder list has me guessing funds will want a fair price, but if push comes to shove, I don't think they'll vote it down. I could be wrong.

If the deal is blocked, the shares likely fall at least to $11 and possibly $8-$9. Much depends on how the container market will be doing at the time. I've owned this at a lower price and sold it when the spread narrowed. At this time and the current price of $15.33, Q1 not having started yet and a bad container backdrop, I'm passing on this deal. However, there is a highly illiquid trade I've highlighted here. I still have a lot to learn about options, options aren't everyone's cup of tea, and it is so illiquid that I've left it out of this article.

It may seem obvious to pass on 1% upside. Keep in mind, it could close relatively quickly. Officially, Atlas Corp. has guided towards H1 2023, but it could easily close in Q1 2023. Atlas Corp. still needs to call an annual meeting. I think it needs to give at least 10 days' notice. In practice, I would think, it is very unlikely to close in the next 20-30 days.

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