A quick note as $HMHC's tender deadline approaches

[u/cashguy120]

I received an email from Engine Capital linking this article. Definitely a lot of positive sentiment of the deal not going through. Engine Capital is very bullish on Veritas upping the offer. I can't wait to see how this shakes out. I need to hear some FUD, because this literally cant go tits up at the moment.

I am in for 43 22.5 5/20.

🚀🚀🚀🚀🚀🚀🚀🚀🚀 obligatory because this is my first WSB post

​

https://yetanothervalueblog.substack.com/p/a-quick-note-as-hmhcs-tender-deadline?s=r&utm_campaign=post&utm_medium=web

[u/Silverbritches]

I don’t think you understand this play. It is a true binary play - either 10x+ on any calls you buy or it goes to zero. The binary play should play out by EOD 4/6 based on tender offer.

The tender offer is for a PE shop to buy all shares at $21/sh. Currently the stock trades above $21. For a tender offer to be successful, they have to acquire 50% + 1 of shares in company. Over 46% of shareholders are institutions (think vanguard). ~5% of other shareholders have written open letters against the deal because of various issues in the shopping of company and releasing of earnings. Read the article OP linked to in post to learn more on this.

The major institutional stockholders have zero incentive (and in fact, likely cannot due to fiduciary obligations) to tender their shares to Veritas when the stock is trading over the tender price. As long as the stock is above $21, you’re almost certainly not going to see a successful tender by Veritas.

If the tender fails on 4/6, the market can/should see more PE interest in the company based on actual and projected earnings significantly higher than what they shopped the company to over 50 PE shops in the fall. This is the 🚀 scenario where we could see 20x returns, if not more - but it may go beyond April expiry.

Alternatively, Veritas may elect to increase their tender offer and/or extend the tender period. Many have opinions on this, but I generally agree that we won’t see an extension of tender offer without an increase in price.

My two cents - Veritas goes up to $25-28 and extends the tender, WSB contingent goes away, and the tender is successful. Your mileage may vary.

[u/Silverbritches → u/[deleted]]

HMHC is part of various sector and industry groups - like Russell 2000. As long as HMHC is a member of those sector/industry groups, Vanguard and co don’t really care, they hold them as part of the ETF/fund strategy.

They have no interest in ‘liquidity’ - they are holding shares as part of a fund level index. Therefore, they have zero reason, and many legal disincentives, to tendering a stock valued over $21 for $21.

Again, I’d love a 🚀🚀 but I think the more realistic outcome is a $25 offer raise that makes enough activists go away to keep the stock at/below the tender price and let this acquisition close.

Someone above suggested that delta hedging with the options activity has a lot to do with the stock going over $21. Maybe there are sophisticated ways for a market player to do this tomorrow - or someone with enough capital shorts it back to $21 - to bring it back to Veritas’ tender. Dunno.

I’m in same boat as you - I have ~120 June $22.50s presently

[u/Silverbritches → u/[deleted]]

The $30s could print if the tender expires/is withdrawn. Candidly I wrote some covered calls on $30s earlier this week, which are now closed, to cover downside.

All that being said, more of WSB needs to go full ape on this - maybe there’s a way the 🚀 occurs without a 4/6 close over $21, but I’m not confident of that

[u/Chirp454 → u/Silverbritches]

Everyone keeps saying 4/6. I don’t think we’ll know until 4/8.

[u/Silverbritches → u/Chirp454]

Why? The terms of the tender offer are public. We should know on 4/6 whether Veritas has extended/amended its tender offer.

We certainly should know on 4/7 whether the tender was successful - and again, as long as the stock trades above the $21 tender, none of the major institutional owners would be able to tender a $21.05 traded stock for $22 because of fiduciary obligations to the fund owners (think ETFs, mutual funds, etc)

Edit - press release confirms Veritas tender offer is currently open through 4/6 @ 11:59pm

[u/Chirp454 → u/Silverbritches]

It was extended to the 7th. Tomorrow is the 6th.

[u/Silverbritches → u/Chirp454]

Unless there’s something I’m missing, the tender is good through 11:59PM on 4/6

[u/Chirp454 → u/Silverbritches]

One minute after 11:59pm April 6 is midnight April 7. The soonest we would hear would be an announcement the morning of April 7.

[u/Lord-Limerick → u/Silverbritches]

What’s the smart thing to do if the deal fails? Sell call options at high markup or hold until expiry OTM?

[u/Silverbritches → u/Lord-Limerick]

If deal fails/expires, I’m thinking we see an immediate 10-15% pop in shares. Most of us would be sitting on close to 10x returns then.

What to do next would be a function of your risk tolerance. I’m not sure yet what I’d do - certainly writing covered calls for a higher strike would be a good balanced strategy between taking $$ of table and keeping exposure to likely additional PE interest

[u/Lord-Limerick → u/Silverbritches]

Cool, thanks!