It has made the headlines in Australia several times – the Mexican construction giant company Cemex has been trying to buyout the Australian building firm Rinker. The deal, which has been dragging on since 26 October 2006, and eventually recommended to Rinkers shareholders by its management, was declared unconditional on 7 June 2007. In other words, the takeover will now go ahead to its completion and Cemex is to hold controlling majority interest in Rinker unless the Australian competition watchdog ACCC decides otherwise.
Now why am I going into all this? From where I stand, the arbitrage opportunity arising from this takeover may have presented the small investors with some easy pickings guaranteed.
Little background
The first Cemex’s Bidders Statement (ie. offer to buyout / takeover a company) was issued in October 2006 and stated the price offered for each Rinker share at US$13 (about A$15.40 at the time RIN shares traded on ASX for approximately A$14.70).
This was almost immediately knocked down as a low purchase price and Rinker’s management unanimously advised its shareholders in its Target Statement (ie. reply to the Bidders Statement by the target company) to reject this offer.
Little push and shove, few months later (10 April 2007 to be more exact) Cemex comes back with new offer of US$15.85 (about A$18.70 at the time Rinker shares traded on ASX pretty much on par with this offer as investors are anticipating the increased bid). Now the things get more interesting.
On 27 April 2007 after careful consideration, the Rinker’s management issue First Supplementary Target’s Statement advising its shareholders that the increased offer presents some premium to the actual value of Rinker so shareholders should accept the offer.
Opportunity for intelligent investor
So once we know that the offer has the backing of Rinker’s management it is highly likely it will be finished successfully hence an opportunity for an investor arises (previous high level of uncertainties essentially attracted more speculative behaviour).
As the offer is made in $US, the tricky bit to consider is the fluctuation of that currency in relation to Aussie dollar. Since the fortunetelling is not a discipline on which any self respecting investor bases his decisions upon, this arbitrage opportunity could have been disregard right here.
However a new clause in Fifth Supplementary Bidder’s Statement made by Cemex states, that it will purchase �?your first 2,000 Rinker shares (or all of them if you hold less than 2,000 shares) for a fixed price of A$19.50)�?. So for anyone with small holding, the exchange rate fluctuation risk had been eliminated!
Now obviously the major institutional players are not overly concerned about this, but a small investor could possibly make some fairly decent returns from this considering, that the shares were still available on ASX for about A$18.65 at the time. Quick calculation reveals that purchase of 2,000 RIN would cost about A$37,300 to be sold directly to Cemex at later date for A$39,000 for a gross return of about 4.6% during the period of, give or take, about 2 months. This would equal to return of about 27%pa. Not bad at all.
In other good news, on 14 May 2007 Rinker advised its shareholders, that Cemex graciously decided that anyone accepting the offer can retain the proposed A$0.25 dividend making our potential return from this exercise exactly A$500 higher (A$0.25 x 2,000 shares held)! But remember that as the ex-date for this dividend payout was 4 June 2007 our investor would have needed to hold the Rinker shares on or before that date.
Obviously the profit boosting dividend ship has well and truly sailed by now however as of Friday 15 June 2007, Rinker is still available for purchase on ASX for about A$18.90 (ie. potential for A$0.60 profit per share if one purchases 2,000 shares or less).
The catch
As the negotiation around this takeover strech over an extensive period of time, large amount of rules and conditions were proposed and later changed or withdrawn. Cemex itself made altogether Eight (!!) Supplementary Bidders Statements lot of which contain, at least in my eyes, confusing law talk and fine print bonanza.
As I did spent my time reading through majority of them, it still appears to me, that the A$19.50 fixed payout is available to ANYONE who accepts the offer before its expiry day (as of latest update this date is set to 22 June 2007). However I also read various other opinions suggesting the A$19.50 was apparently conditioned by holding the RIN share at some preset date, which has now passed.
To me, the most helpful facts are coming from Rinker’s Target’s Statements. The latest one (First Supplementary Target’s Statement) dated 27 April 2007 in its FAQ section states:
Do I need to have held Rinker Shares on a particular date to be eligible to have the option of receiving a fixed australian dollar price of A$19.50 per Rinker Share, for my first 2,000 Rinker Shares?
No. Initially CEMEX announced (on 10 April) that only those shareholders that held Rinker Shares on 12 April would be entitled to receive the fixed Australian dollar price for their first 2,000 shares. However, this requirement was not included in the Fifth Supplementary Bidder’s Statement which contains the terms on which Rinker Shareholders can elect to receive a fixed Australian dollar price of A$19.50 per Rinker Share, for their first 2,000 Rinker Shares (or for all of their Rinker Shares if their holding is less than 2,000).
Conclusion
As the unclarity and uncertainty settled in I decided to only watch this potentially profitable opportunity from the sidelines. In my investments I like to be as certain as possible about the conditions I get myself into. And even more so when it comes to such an essential, make or break component as is the sale price. I think Warren Buffett normally puts it something on the lines of “if not sure, do nothing�?, which is one of my personal investing rules I choose to exercise now.
Word of caution: The above stated facts and information are my personal opinions and conclusions. Don’t base your own vital investment decisions on mine, maybe faulty, theories. Rather get your own thorough research to provide a solid base for your own investing moves.
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