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An investor who, like most, is seeking ideas that generate alpha. I enjoy arbitrage and special situations, as well as traditional long ideas.
  • Bridgepoint Education (BPI) Just Dropped $100 On The Ground - Here's How To Pick It Up 32 comments
    Nov 15, 2013 9:12 AM | about stocks: BPI

    Bridgepoint Education (NYSE:BPI) has just dropped $100 on the floor with no intention of picking it up. I am here to help you learn how to pick it up.

    ---

    On 11/13/2013, BPI commenced a tender offer to purchase ~$200M of its common stock at $19.50, representing ~18.8% of its float, or 10.25M shares. These tenders are typically a positive sign for a company, as it indicates that they are generating enough free cash that they can return some to shareholders. In this case, $BPI appears to be doing particularly well if it is commencing a tender offer for close to 20% of its outstanding common stock. Thus, not surprisingly, $BPI's shares surged after the news, hitting a high of about $18.40 before some people took profits.

    Now, for anyone who trades tender offers, you know that the biggest concern is proration. Proration refers to the number of shares that are not accepted by the company in a tender offer. In other words, if you tender 1000 shares, and there is 50% proration, only 500 of your shares will be purchased by the company, with the other 500 shares returned to you. In my experience, handicapping the expected proration rate is a fool's errand and you would be wise not to try it.

    Because of this proration risk, most tender offers aren't that exciting to trade. However, on occasion, a company will include an "odd-lot priority" provision which all-but guarantees that your shares will not be prorated. Fortunately for us, $BPI's tender offer includes such a provision.

    For those interested, here's the exact language from the tender offer's prospectus:

    What happens if more than 10,250,000 shares are tendered?

    If more than 10,250,000 shares (or such greater number of shares as we may elect to purchase, subject to applicable law) are properly tendered and not properly withdrawn prior to the expiration of the Offer, we will purchase shares:

    first, from all holders of "odd lots" of fewer than 100 shares who properly tender all of their shares and do not properly withdraw them before the expiration of the Offer;

    second, from all other stockholders who properly tender shares, on a pro rata basis (except for stockholders who tendered shares conditionally for which the condition was not satisfied) and optionees tendering shares underlying options, each with appropriate adjustments to avoid purchases of fractional shares; and

    third, only if necessary to permit us to purchase up to 10,250,000 shares (or such greater number of shares as we may elect to purchase, subject to applicable law), from holders who have tendered shares conditionally (for which the condition was not initially satisfied) by random lot, to the extent feasible. To be eligible for purchase by random lot, stockholders whose shares are conditionally tendered must have tendered all of their shares.

    Because of the "odd lot" priority, proration and conditional tender provisions described above, we may not purchase all of the shares that you tender. See Section 1.

    If I own fewer than 100 shares and I tender all of my shares, will I be subject to proration?

    If you (1) own beneficially or of record fewer than 100 shares in the aggregate, (2) properly tender and do not properly withdraw all of those shares before the Offer expires and (3) complete the section entitled "Odd Lots" in the Letter of Transmittal and, if applicable, in the Notice of Guaranteed Delivery, we will purchase all of your shares without subjecting them to the proration procedure. See Section 1.

    Important Dates

    Before I get to how to execute the trade, there are a few important dates you should know about. First, the tender offer expires at 5:00PM on December 11, 2013. This means that you must tender your shares before that time in order to get paid. As a result, the last day that you can purchase BPI shares is December 6, 2013 because you need three days to lapse before the shares will settle in your brokerage account. Think of it like an "ex-date" for a stock paying a dividend -- you need to buy the shares 3 days before the date of record in order to receive the dividend. Same process here.

    Executing the Trade

    So, with that background, here's how you execute the trade. Keep in mind, however, that everyone's broker is different and may require you to through jump through different hoops in order to get this done. As a result, your mileage may vary.

    1. Buy no more than 99 shares of $BPI at some point before now and December 6, 2013.

    2. Call your broker and ask them to tender your shares under the odd-lot priority provision. (Not all tender offers require you to specify odd-lot priority, but it's usually better to be safe than sorry).

    3. Sit back and wait until you get paid on your shares. This should take place no later than a week from the tender's expiration.

    At today's price of $17.72, and the tender price, you are looking at a profit of $176.22 in about a month. Put another way, you are risking $1754.28 to make $176.22, or about a 10% return. If you annualize this, you are looking at about a 120% return. Not bad.

    Risks

    It's always important to consider the risks of any trade when entering it. There is truly no such thing as a free lunch (although these odd-lot provisions come dangerously close).

    (1) More than 10.25M shares are tendered as an "odd-lot." While, in my opinion, highly unlikely, it is possible that more than 10.25M shares are tendered as an odd-lot. In this case, you would be subject to proration even if you tendered less than 100 shares. I have never seen this happen, but it's still theoretically possible. This is also incredibly unlikely given that Warburg Pincus, the company's majority shareholder, has advised BPI that it intends to tender 8.6M shares in the offer.

    (2) Section 7 of the prospectus sets forth "Conditions of the Offer," which is unmet, could result in the cancellation of the tender offer. While I'm not going to list the conditions here, I recommend everyone takes a look at this section the prospectus before investing. Nevertheless, there doesn't appear to be any unusual conditions in Section 7 that would lead me to believe the tender offer is unlikely to be consummated.

    GL all

    Disclosure: I am long BPI.

    Stocks: BPI
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Comments (32)
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  • Nat Hunt
    , contributor
    Comments (147) | Send Message
     
    What about these problems:

     

    $7.95 commission to buy
    $38.00 voluntary reorganization fee
    $7.95 commission to sell?

     

    That's an extra $53.90 of expenses, knocking one-third off the return. (Those are Fidelity fees according to their website.)

     

    Furthermore, it's a short-term gain and subject to an ordinary income tax rate.
    20 Nov 2013, 01:09 AM Reply Like
  • Alpha Hungry
    , contributor
    Comments (101) | Send Message
     
    Author’s reply » Thanks for your comment. Transaction costs should always be considered when making any investment. However, the only unique expense in this trade is the voluntary reorganization fee, which I agree eats into a significant portion of the profit. Many brokers, including Fidelity, are usually willing to waive this fee if you ask them politely (although your account balance may need to above a certain threshold before they are willing to do this).

     

    Nevertheless, based on the market price of $17.9, there is currently a spread of $158.4 on the trade. Subtracting those $53.90 expenses that you listed still gives you profit of over $100.
    20 Nov 2013, 09:09 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (7385) | Send Message
     
    I keep hearing about such fees on Seeking Alpha. It is strange, but I have invested my whole life, have dozens of brokers and deal with a number of banks; none have once ever tried to change me fees anywhere near that much. I've never been charged a reorganization fee. My guess is that if you have a good relationship, you can ask them to waive such fees. They should be embarrassed by trying to nickel and diming their clients in that fashion.
    6 Dec 2013, 11:44 AM Reply Like
  • nickravo1
    , contributor
    Comments (3) | Send Message
     
    Why would anyone trade in Fidelity when there is Interactive Brokers? 100 shares, 0.50 to $1, no fee on an odd lot tender. I mean $16 RT to trade 100 shares of stock. That's sucker stuff, man.
    11 Dec 2013, 08:17 PM Reply Like
  • Nat Hunt
    , contributor
    Comments (147) | Send Message
     
    Cause I don't have enough money to go with IAB.
    11 Dec 2013, 10:05 PM Reply Like
  • Nat Hunt
    , contributor
    Comments (147) | Send Message
     
    Nice, thanks.

     

    What do you think are the odds that they will rescind the offer?

     

    I've tried to figure this out based on the little I've read on the subject. I am guesstimating there can't be more than a 15% chance it gets rescinded -- and probably much less.

     

    I wonder if there are stats somewhere that talk about what percentage of tender offers of this sort fall through. You ever seen any?

     

    BTW I wrote up my own take on this Bridgepoint situation on my own blog.
    22 Nov 2013, 02:15 PM Reply Like
  • Alpha Hungry
    , contributor
    Comments (101) | Send Message
     
    Author’s reply » Odds are slim to none. It is very rare for a tender offer to be rescinded, and truthfully I've never encountered it myself. My thinking is that the tender would only be rescinded in very extreme circumstances (e.g., fraud uncovered, dramatic shift in regulatory scheme on for-profit education).
    22 Nov 2013, 10:01 PM Reply Like
  • arbtrader
    , contributor
    Comments (328) | Send Message
     
    AH- they can change the terms to alter the proration to ALL shares and no small shareholder exemption. This happened to me years back and I still have a small fractional shareholding position of 3-5 shares not worth selling. My impression was: the more attention drawn to the odd lot carveout, the easier for the sponsors to delete it. I'm not aware of any SEC requirement to protect sub-100 lot owners, mainly it seems to save the company distribution costs of mailing info to small SH.
    Best. AT
    6 Dec 2013, 11:53 AM Reply Like
  • Alpha Hungry
    , contributor
    Comments (101) | Send Message
     
    Author’s reply » Very helpful, thanks.
    6 Dec 2013, 02:49 PM Reply Like
  • aretailguy
    , contributor
    Comments (1547) | Send Message
     
    Cool idea Risk Ahead! Count me as a follower with when these opportunities exist!!!
    6 Dec 2013, 12:46 PM Reply Like
  • steppppo
    , contributor
    Comments (240) | Send Message
     
    15 minutes to go ... I'm thinking of buying in my retail account. Will it settle in time?
    6 Dec 2013, 03:46 PM Reply Like
  • Nat Hunt
    , contributor
    Comments (147) | Send Message
     
    Yeah it would've -- if you bought.
    7 Dec 2013, 12:18 PM Reply Like
  • steppppo
    , contributor
    Comments (240) | Send Message
     
    I bought earlier in my IRA and tendered those 99 shares. Decided not to get greedy and buy in my retail account also.
    12 Dec 2013, 09:26 AM Reply Like
  • arbtrader
    , contributor
    Comments (328) | Send Message
     
    Watch if you do it in the same brokerage house. Technically the 99 shares are supposed to be per person. Do it in 2 accounts and a clerk (who is supposed to verify you only have 99sh) may bounce you out of the odd-lot category. Never a problem w using diff brokers but did one time in an IRA and a Jt account with the same names, same broker!
    12 Dec 2013, 09:55 AM Reply Like
  • steppppo
    , contributor
    Comments (240) | Send Message
     
    Cool. Thanks for the head's up.
    12 Dec 2013, 10:28 AM Reply Like
  • Alpha Hungry
    , contributor
    Comments (101) | Send Message
     
    Author’s reply » I have done this successfully. But, I agree, like most considerations in this trade, it depends on your broker.
    12 Dec 2013, 10:42 AM Reply Like
  • Eric Milner
    , contributor
    Comments (34) | Send Message
     
    Anyone have any insight on whether or not Warburg Pincus will be tendering any shares? I see they expressed interest in selling earlier this year but BPI announced the tender offer after a nice drop in the price of their stock. So, I'm torn on whether this was initiated by Warburg so they could tender or because it is accretive.
    10 Dec 2013, 10:42 AM Reply Like
  • Alpha Hungry
    , contributor
    Comments (101) | Send Message
     
    Author’s reply » The prospectus indicates that he, and several other directors, will be tendering. Proration is essentially a lock.

     

    "Warburg Pincus Private Equity VIII, L.P. and its affiliates (“Warburg Pincus”), our major stockholder, has advised us that it intends to tender the maximum number of shares it can tender without potentially triggering a change in control of the Company under applicable regulations and accreditation standards, assuming pro ration. The Company currently estimates that this will result in no more than 8.6 million shares held by Warburg Pincus being accepted, although, depending on the participation in the tender by other stockholders and pro ration, the number of shares held by Warburg Pincus that is accepted could be less. We anticipate that our directors and executive officers intend to tender, in the aggregate, approximately 4.2 million shares beneficially owned by them (including shares underlying certain exercisable options) in the Offer, although no final decisions have been made."
    10 Dec 2013, 01:12 PM Reply Like
  • Eric Milner
    , contributor
    Comments (34) | Send Message
     
    Thank you very much!
    10 Dec 2013, 01:40 PM Reply Like
  • Nat Hunt
    , contributor
    Comments (147) | Send Message
     
    All the insiders want out of this stock.
    11 Dec 2013, 10:05 PM Reply Like
  • Alpha Hungry
    , contributor
    Comments (101) | Send Message
     
    Author’s reply » Bridgepoint Education Announces Preliminary Results of Tender - http://yhoo.it/19iUNcx

     

    19.4% proration factor. If you had bought 100 shares, only 19 would have been accepted. If you bought 99, they will all (hopefully) be accepted. This is the benefit of the odd-lot.

     

    Final results of the tender should be announced in a few days.
    11 Dec 2013, 10:23 PM Reply Like
  • Nat Hunt
    , contributor
    Comments (147) | Send Message
     
    When do we get our money!?
    13 Dec 2013, 05:04 PM Reply Like
  • Nat Hunt
    , contributor
    Comments (147) | Send Message
     
    BTW 19% proration factor, when the company is buying back 20% of itself means, I think, that virtually EVERY SINGLE SHAREHOLDER tried to tender ALL their shares.
    13 Dec 2013, 05:04 PM Reply Like
  • Alpha Hungry
    , contributor
    Comments (101) | Send Message
     
    Author’s reply » With a 19.4% proration factor, the number of tendered shares was close to 53 million (10.25M/53M = ~19.4%). The tender prospectus states that the diluted share count was close to 56M as of September 2013. So, yes, almost the entire ownership tendered. This helps explain why the stock dumped after the preliminary tender results were released.

     

    As to when you will be paid, I can't give you an exact date. I can tell you first you need to wait for the final tender results to be released. They should come out tonight or Monday evening. It usually takes no more than a week to get paid after the final results are announced.

     

    Also, Nat--I encourage you to do your own diligence on some of these questions. While I am happy to help, I think it's a bit lazy to ask questions that you could easily answer yourself. The saying "don't ever ask an interviewer questions that could be answered on the company's website" comes to mind. I don't mean any offense by this--and again, I am happy to help you and others--but I think you will find that people are more receptive to your questions when you come across as genuinely in need of assistance.

     

    As a further point, you shouldn't take anything I (or other authors) say in this article as gospel. I am not an expert, nor do I claim to be. I am susceptible to making mistakes, which you, as the investor, are responsible for vetting being risking your hard-earned capital. "Trust, but verify."
    13 Dec 2013, 08:58 PM Reply Like
  • Nat Hunt
    , contributor
    Comments (147) | Send Message
     
    LOL Well I appreciate it anyway. Your analysis here helped me think through the thing. You can always just not answer my questions, too :P
    13 Dec 2013, 11:27 PM Reply Like
  • Alpha Hungry
    , contributor
    Comments (101) | Send Message
     
    Author’s reply » Final tender results are out. This took a little bit longer than I expected, but I suppose that could be the result of so many shares being tendered. Proration factor ended up at 19.9%. All odd-lots that were validly tendered will be accepted.

     

    http://yhoo.it/1fnPbOB

     

    You should expect to get paid on your shares in the next few days. This concludes the BPI trade!
    18 Dec 2013, 06:06 PM Reply Like
  • aretailguy
    , contributor
    Comments (1547) | Send Message
     
    Thank you very much Alpha Hungry!
    18 Dec 2013, 07:41 PM Reply Like
  • Nat Hunt
    , contributor
    Comments (147) | Send Message
     
    Who got in at the lowest?

     

    I hesitated for weeks and then bought for $18.20 on December 6.
    19 Dec 2013, 11:20 AM Reply Like
  • Alpha Hungry
    , contributor
    Comments (101) | Send Message
     
    Author’s reply » I think my best entry was $17.9. Also, BPI paid today - you should see the cash in your accounts.
    20 Dec 2013, 11:57 AM Reply Like
  • aretailguy
    , contributor
    Comments (1547) | Send Message
     
    Fidelity posted cash to the account today. Nice little trade.
    20 Dec 2013, 12:17 PM Reply Like
  • Approximately Right
    , contributor
    Comments (29) | Send Message
     
    Nice little trade! I try to do as many of these as possible, as well as go-privates with reverse splits. For those who aren't aware, OptionsHouse does not charge a fee for voluntary tenders. This could be a good option for smaller investors who may have difficulties getting such fees waived by their current brokers.
    20 Dec 2013, 12:57 PM Reply Like
  • aretailguy
    , contributor
    Comments (1547) | Send Message
     
    Alpha, where do you go to find these kind of deals? This one was fun!
    20 Dec 2013, 01:08 PM Reply Like
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