You can find my initial investment thesis here.
Yesterday, EQU’s management filed the definitive proxy statement with respect to EQU being acquired by Petroflow.
Under the Arrangement, Petroflow Sub will acquire all of the outstanding common shares of Equal for USD 5.43 per share, payable in cash. Upon completion of the Arrangement, Equal Shareholders will also receive a cash dividend of USD 0.05 per share. A USD 0.05 dividend per share was already paid to investors in May being part of an increased offer to shareholders due to a delay in the acquisition process. Hence, since my initial write-up Petroflow’s offer to shareholder’s increased by USD 0.1 per share.
A shareholder meeting will be held on July 8, 2014. At least 66 2 ⁄ 3 % of the votes must be voted in favour of the transaction. In addition, the transaction is subject to a minority approval. Lawndale Capital Management, holding roughly 4.8% of EQU’s shares, has already indicated that they will vote against the transaction. So despite the efforts made by EQU’s management to get the deal done, I believe it is still likely that the deal falls apart.
With the share price currently trading at the offer price of USD 5.43, I will skip the additional USD 0.05 per share dividend to be paid after deal completion. I will start to sell my position from today with a limit of USD 5.40. This implies a total return incl. dividends of roughly 15% over a two months holding period.
Not only me, but also the market underestimated EQU’s management’s willingness to get the deal done, as they are highly incentivized. In my original scenario analysis I estimated a 25% probability that the deal will be completed. In hindsight this was far too low. (Though the deal has not been commpleted yet)
Given that I saw a 75% probability that the deal falls apart, I planned to increase my initial 2% portfolio position after a drop in the share price (triggered by the unsuccesful transaction). Nevertheless, based on the original scenario analysis, all the potential outcomes led to a higher share price. So it might have been a better strategy to establish a larger position right at the beginning given this high conviction investment.
Edit 6/15/2014: Position sold on 6/13/2014 for an VWAP of USD 5.41. Realized gain of 17.2%.
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