TNK - Euronav: 3.7% Upside To Expected Tender Offer Due To Perceived Risk

Summary

• A major shareholder disagrees with the premise behind the merger of Frontline Ltd. and Euronav NV.
• I believe this opposition was expected to an extent and the companies worked around it.
• The public resistance is unlikely to dissuade them from issuing a tender offer.
• If the tender offer isn't issued, the share price damage is potentially not all that bad.

Oil tanker shipping companies Frontline Ltd. ( FRO ) and Euronav NV ( EURN ) have signed an all-stock merger deal . Euronav shareholders should get the option of receiving 1.45 Frontline shares for every Euronav share. Pre-market, that's $16.74 worth of shares. That's around 3.7% of upside.

The upside seems large as the tender was originally expected to be executed around Q4 2022. There's been what's perceived as a major setback in that the Saverys group, that holds over 25% of voting rights, are opposing the merger:

We hereby invite you to terminate the Combination Agreement. The aim of the Combination Agreement, a legal merger of Euronav and Frontline, cannot be realised without 75% shareholder support. As we control more than 25% of the voting rights and oppose the merger, the merger has become unachievable. Your fall-back scenario, whereby Frontline would control more than 50% of Euronav without being able to effect a full merger, is in our view effectively unworkable and value-destructive for all parties involved.

From the earnings calls of Frontline and Euronav, I get the impression this opposition was expected, and that's why they're tendering. People who don't tender can stay a shareholder of Euronav (which is then a controlled entity of Frontline if 50%+ of the shares do tender).

From the Frontline earnings call:

So, let's move from slide 12 to slide 13 and just a few comments on the Frontline, Euronav combination. As you know, kind of anything and everything around this combination is obviously quite sensitive. I just want to go through the steps. And the Frontline relocation comes first and it's in process and post that we’ll launch the tender offer. A lot of analysts and market players have asked us about these delays. These are regulatory caused delays.

The process of moving Frontline to Bermuda -- to Cyprus -- from Bermuda to Cyprus has proven complicated. There are lots of regulatory bodies involved and they use time. But, we are -- we continue to be committed to this process. However, the launch of the tender offer has slipped to Q1 next year. The outcome remains the same. Depending on how much support we get in the tender offer, if we get above 75%, we will have a merger or move for a merger. If we are between 50.1% and 75%, we will form a group. On Frontline, we’ll gain controlling interest in both scenarios.

The market may be a bit nervous about the opposition as the company also moved the date for the tender offer into Q1 2023. I don't like it either, but this is explained as a tactical delay on the Euronav earnings call:

Yeah. So maybe two questions, the first one is on timing. And initially we had -- we were very ambitious. And we said that, we should be able to close the transaction in Q4. Obviously we had plans to use the full Q4 to do that. And what happened is that, we could be in a position to launch the tender offer in Q4, but that would mean that we go over the Christmas period and the holiday period which is suboptimal.

So today we prefer to announce to the market that the idea is to launch the tender offer as early as possible in Q1, but then have the full period where the tender offer is open free of holidays, free of -- I would say bank holidays and people not maybe paying the same attention as they would in other periods. So that's very much the main reason. So we're not talking about a big delay. We're talking about a strategic delay, if I may use that term.

Other things that could delay this side, well, there are things that we control and there are things that we don't control. The thing that we don’t control is all the regulatory part. Most of the filings in the U.S. or in Belgium they have -- the regulator has a certain time to analyze the file before we make them a problem before we or frontline makes them public. That's on the first review.

The second review usually is not -- has no time limit. So if there is delay, then there is very little we can do but most of the time we don't expect to see one. So we are optimistic that we can meet the new timeline that we have set to the market.

And then, on your last question, which is, our largest shareholder at the moment which is CMB which has indeed bought more shares and that's -- that's talking that. I suppose they believe in the business which is always great to hear, especially at those prices. It means that yeah today they have a position of 21%.

If we want to do a full merger with Frontline i.e. create one big company, we need 75% of the vote once someone has 21 or more votes, it becomes very difficult because not everyone is voting. And that's the reason why we have structured this transaction has a two-step process.

The first step is a combination. So it's not a merger. We will be able to achieve we believe up to 90% of the synergies of a fully merged company. We will look at every single department I would say, be it on the revenue side, on the cost side, the overhead and really act as one group.

But indeed in order to achieve a full merger, we will need to see what happened with CMB's stake and already how many shares we can collect in the tender offer. So that's something that we will do at the second stage of the rocket, I would say and certainly after the tender offer.

This seems reasonable enough to me. I think there's a good chance the full merger won't be accomplished. At the same time, it seems likely to me that the tender will go forward and I can tender my Euronav shares right into it for 1.45 FRO shares.

I already had a small Euronav position that I held unhedged. With Europe cutting off insurance for Russian oil tankers, I thought there was a good chance for very high tanker rates. This doesn't seem to materialize to the extent I'd hoped. Today, I added to my Euronav position but hedged these new shares by going short 1.45x as many Frontline shares. The annualized borrow cost seems to be around ~2%. That's low enough that I prefer to be hedged on a now larger position into the tender offer.

It is always good to think about the downside if the tender offer doesn't materialize after all for some reason. I pulled up a graph of the performance of the major tanker companies since the merger announcement:

Interestingly enough they moved exactly in tandem, except Teekay Tankers ( TNK ), which is more highly leveraged compared to the others.

I also looked at performance since 1-month before the merger announcement to account for the merger announcement and possibly merger information leaking out into the market:

This shows pretty much the same picture except maybe Frontline (as the acquirer) got dinged a little bit by the market. I don't perceive a major bump to Euronav shareholders on announcement. This may be one of the reasons a major shareholder is a bit miffed the company is being taken away from them at fair value without a solid premium.

This also leaves me with the impression that Euronav may not decline all that much in case of the tender offer getting scrapped. In this strong VLCC market, the company must also hold back on returns of capital (except for a small dividend) until the tender closes or it's scrapped:

Yes absolutely. I mean when you do a merger and you calculate the economics namely the ratio, you are normally freezing the dividends. So otherwise, the economics are changing. So what we have in the agreement is obviously, we can continue to pay a minimum dividend the €0.03 that we pay every quarter that's in the books. But we are now moving to a market that should allow us to return more capital to the shareholders. And we will do so but only after we have the tender over – the tender offer closed and that's obviously the same for frontline and they have paid a dividend in Q2 that was also agreed and calculated in the ratio.

But then we should hold on paying dividends until the tender offer is closed and that we expect as you've seen to be on in Q1. So there might be a little lag of a quarter and even not a full quarter, I mean probably one or two months, if you look at your calendar and when we pay dividends related to every quarter.

This is a weirdly structured deal with opposition from a major shareholder. A delayed tender offer on top of that. However, the upside to the proposed tender offer is 3.7%. The risk is relatively straightforward to hedge out. The tender offer should soon be announced and then the return can more or less be "locked in." I expect a nice little bump on that announcement.

If the tender offer doesn't come, it isn't the end of the world to hold a long Euronav or a combination of long Euronav vs. short Frontline. I see more general shipping risk (much less so in the hedged version of the trade) than deal break risk given the imperceivable premium to the market price.

Finally, there is a slight risk the tender offer is issued but undersubscribed. This is a risk, but if this happens it sends a clear message shareholders don't want to sell at a premium to the market price, which means they definitely shouldn't sell at the market or lower.

For further details see: