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What justifies ANDV trading around $140 when share holders will get $152.27? As I do not want MPC shares, what could prevent ANDV holders getting $152? Would it be better to bail now at $140? Help please.

Marathon Petroleum agreed to acquire Andeavor (formerly Tesoro) for $23.3 billion, based on MPC’s April 27, 2018, closing price of $81.43. ANDV shareholders will have the option to choose 1.87 shares of MPC stock, or $152.27 in cash subject to a proration mechanism that will result in 15 percent of ANDV’s fully diluted shares receiving cash consideration. This represents a premium of 24.4 percent to ANDV’s closing price on April 27, 2018. MPC and ANDV shareholders will own approximately 66 percent and 34 percent of the combined company, respectively.

closed as primarily opinion-based by Pete B., NL - Apologize to Monica, MD-Tech, JTP - Apologise to Monica May 9 '18 at 21:53

Many good questions generate some degree of opinion based on expert experience, but answers to this question will tend to be almost entirely based on opinions, rather than facts, references, or specific expertise. If this question can be reworded to fit the rules in the help center, please edit the question.

  • "subject to a proration mechanism" could mean that the actual cash amount will not be $152.27, but the cash equivalent of 1.87 shares of MPC stock, which would be about $140 is MPC trades at $81.43. – D Stanley May 8 '18 at 17:08
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    The transactional problem is what is the meaning of "option to elect 1.87 shares of MPC stock or $152.27 in cash per share subject to a proration mechanism that will result in 15 percent of ANDV's fully diluted shares receiving cash consideration"? Clearly only 15% of ANDV shares are eligible for cash but is that for $152.27 or a proration up to that amount? As with all mergers, your concern is the shares that you will be receiving. Your decision to hold should be based primarily on whether you wish to own MPC and secondarily if you want to take a shot at the $152.27 – Bob Baerker May 8 '18 at 19:16
  • One thing, 1.87 shares valued at $81.43 would be $152.27. ...and I understand that each ANDV share will receive MPC shares of a value totalling $152.27. So when the deal closes if MPC will be trading at half of $152.27 do holders get 2 shares of MPC to the value of $152.27? And they will be available to be sold immediately? I truly appreciate your help. – luba May 9 '18 at 2:02
  • Here's my take and I'm open to correction. Merger announced on 4/30 and valuation based on MPC's close of $81.43 on 4/27/18. Yes, 1.87 shares valued at $81.43 is $152.27 and you'll receive that in cash if < or = 15% tendered for cash. If more than 15% then it's a mix of cash and MPC shares (see TripeHound's explanation below). If you end up receiving shares, total value could be higher or lower than $152.27 depending on the price of MPC shares on the merger date. If MPC is "trading at half of $152.27" when the deal closes, 100 shares of ANDV will be worth 1.87 * $76.13 or $142.37 – Bob Baerker May 9 '18 at 22:38
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What justifies ANDV trading around $140 when share holders will get $152.27?

Probably a combination of two factors:

  • It's possible the deal may not go through. Although the deal "was unanimously approved by both companies' boards of directors" (see Houston Business Journal), there are still regulatory hurdles and shareholder acceptance to deal with. The $152 price is, at this stage, only the potential value of an ANDV share (which, prior to this announcement, seemed to be averaging somewhere around the $100 level).

  • Because the offer is 15% cash and 85% shares in the merged company, the current price at least partially reflects the value of MPC (it's current share price is $75, and 1.87 times that is $140)

What could prevent ANDV holders getting $152?

and, from comments:

So when the deal closes if MPC will be trading at half of $152.27 do holders get 2 shares of MPC to the value of $152.27?

What the holder of each ANDV share will get is explicit and not dependent on the share price of either company:

Subject to the terms and conditions set forth in the Merger Agreement, upon consummation of the First Merger, each share of Andeavor common stock, [...] will be converted into and become exchangeable for, at the election of the holder of such Andeavor Share, either (a) $152.27 in cash or (b) 1.87 shares of common stock [...] of the Company [MPC]

Source: Agreement and Plan of Merger on 4-traders

but is subject to the proration you mention:

Cash elections and stock elections, as applicable, will be subject to proration if cash elections are made in respect of more or less than 15% of the outstanding Andeavor Shares on a fully diluted basis. Andeavor Shares in respect of which no cash election or stock election is validly made will be deemed to be Andeavor Shares in respect of which stock elections have been made.

Source: ibid

The concept of proration is defined by The Free Dictionary as:

Proration

Refers to the division between cash and stock in a takeover offer. Often a takeover is a combination of cash and the acquiring firm's equity. Shareholders can elect to take cash or equity. After the election is made, the stock is prorated. For example, if the takeover offer was 500 million in cash and 500 million in shares, if everybody elected cash, then the maximum cash for each shareholder is 50%. If 75% elected to receive cash, 25% of the shareholders would get 100% equity and the other 75% would get 75% cash and 25% equity. The proportions are complicated to compute if the new shares are worth more than the old shares. In this case, small shareholders (with say 100 shares) might receive 100% cash because it is disadvantageous to have a lot less than 100 shares.

So, for instance, if 20% of ANDV shareholders elected for cash (and 80% elected for shares), then the 80% who wanted shares will get all shares; the 20% who wanted cash will get a mixture of cash and shares. I think this will be 75% cash and 25% shares... because what remains will be the original 15% cash and the remaining 5% (of an original 85%) of the shares – a ratio of 3 to 1.

Conversely, if only 10% elected to take cash (and 90% wanted shares) then all those wanting cash will get it, and the 90% will get a mixture of shares and cash. I think 94.44% shares to 5.55% cash... because what remains will be the original 85% shares and the remaining 5% (of an original 15%) of the cash – a ratio of 17 to 1.

As the TFD definition notes, how many shares would be involved in a prorated assignment can get complicated and will depend on which price is used to value the MPC shares (e.g. the price on the day of the announcement, the price on the day of allocation, or some other price). That information doesn't appear to be in the Agreement: it may be in the details available to shareholders.

Would it be better to bail now at $140?

That's for you to decide :-)

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