TGH - Textainer Group: Fair Go-Private Offers Immediate Capital Gains

2023-10-25 10:30:00 ET

Summary

• Textainer Holdings has accepted a go-private offer from private equity group Stonepeak, resulting in the company being delisted.
• Stonepeak's all-cash offer is attractive and represents the highest-ever share price for Textainer.
• The proposed deal ensures that every shareholder, both common and preferred, will make a profit.

Introduction

As you may know, I have been covering Textainer Holdings (TGH) here on Seeking Alpha for several years now , and although I traded in and out of the company's preferred shares, I have been holding on (and adding) to my position in the preferred shares as I liked the risk/reward ratio. Unfortunately, it now looks like Textainer will be delisted as it accepted a go-private offer from private equity group Stonepeak.

The all-cash offer is pretty attractive

The proposed deal is very simple: Stonepeak has made an all-cash offer to acquire all outstanding shares of Textainer Group for $50/share . Additionally, Stonepeak confirmed it plans to retire the preferred equity as well, and the preferred shares will be redeemed subsequent to the completion of the buyout. This acquisition comes hot on the heels of the go-private deal of Triton International, another major container lessor.

It looks like this proposed go-private transaction only has winners. The $50 bid represents the highest-ever share price for Textainer so its management can definitely say that not a single shareholder has lost money on Textainer, no matter at what price they bought it since Textainer went public in 2007.

Additionally, the offer represents a very substantial premium to the book value of just under $41/share (the $1.69B in common equity divided over the 41.3M shares outstanding). While you could argue the fair value of the containers is higher than the book value, it still is a good deal as Textainer's share price didn't even reflect the book value of its assets and it certainly didn't reflect the fair value.

Long story short, the offered price of $50 per share ensures every single shareholder makes a profit.

What does this mean for the preferred shareholders?

Although I used to have a long position in the common shares in the past, my current position is limited to a long position in both series of preferred shares. The Series A and the Series B. The main reason to own both series is because Series A was supposed to start to float in 2026 with a new preferred dividend yield based on the five-year Treasury rate plus a 613.4 bp markup. The Series B has a fixed preferred dividend rate of 6.25%. And that's why I owned both: If interest rates remain high for the next few years, the Series A would likely get a double-digit preferred dividend yield. And if rates would move down, I would likely be able to see the share price of the Series B go up.

While Stonepeak does not have a history of leaving the preferred shares outstanding (Stonepeak also acquired Teekay LNG Partners back in the day, but the preferred shares are still outstanding), I was surprised to see the press release mention both classes of the preferred shares will be redeemed.

We currently expect that Textainer's Series A and B cumulative redeemable perpetual preference shares will be called for redemption at the amount set forth in the applicable certificate of designation for such preference shares no later than 120 days following the closing.

So why are the preferred shares still trading at a discount to the call value of $25 per preferred share? I think there are two explanations here.

First of all, there is time value. The preferred shares may only be called four months after closing the acquisition (sure, this could be two weeks but it could also be the entire 120-day period), so the market is allocating some time value to the preferred shares. For instance, if the acquisition closes in January, it's theoretically possible the preferred shares will only be redeemed in April or May. That's six months from now. The Series B are now trading at $24.20 which means that the total return will be approximately 6%, assuming the redemption happens within six months.

Secondly, there is a go-shop period: Textainer is allowed to look for a higher offer until Nov. 22. As I think the Stonepeak offer is very fair I doubt another bidder will emerge. However, the risk associated with this go-shop period is that a potential other bidder may decide to not redeem the preferred shares. In the (I think quite unlikely) event that happens, the Series B share price will nosedive but the Series A will likely suffer as well.

Investment thesis

I currently have a long position in both the Series A and Series B of the preferred and I will likely keep the position until the redemption is complete. I don't expect a third party to come up with a higher offer for Textainer so I'm mentally preparing myself to either sell my positions on the open market or see the preferred shares getting called.

I think every shareholder (common and preferred) is getting a fair deal out of the proposed go-private transaction.

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