Last Hidden Gem: Nassau Reinsurance Group Holdings To Acquire The Phoenix Companies

| About: The Phoenix (PNX)

Summary

The shareholders have approved the transaction on December 17, 2015.

The merger process is very advanced, and it should close soon. It is a unique opportunity created by low visibility of the stock and inadequate liquidity.

The purchase price is $37.50 per share, and the stock is trading at the level of $36.49. You can help me in closing this gap.

Introduction

Sometimes we see opportunities that pay us in about two months, sometimes in about one month, and a few times we get paid just in some weeks. In this rare situation, you should think fast and act quickly. Many other sharp individuals study the markets, and can easily eliminate this inefficiency.

This week, I have identified one of such opportunities. The acquisition of The Phoenix Companies Inc. (NYSE:PNX) ("Phoenix") by Nassau Reinsurance Group Holdings L.P. is almost closed. Various conditions were fulfilled. So, the price should obviously trade close to the offer price. Well, that is not happening. Seeking Alpha and Maudes Capital bring you the opportunity to make tons of dollars with this trade (the respected author Richard Lejeune has also written a lot about it, read it here).

The buyer

Nassau Reinsurance Group was created in April 2015. It deals with an insurance business. Nassau was founded by Golden Gate Capital, a private investment firm operating $15 billion.

Source

As per my opinion, the size of the investment firm owning Nassau is very important fact. The size of the target, $217.2 million of market capitalization, is very small as compared to that of the buyer (the buyer is a private company). Therefore, the buyer has a lot of resources to buy Phoenix. In addition, the target is so small that I do not expect that regulators will stop the merger.

For me, this research is enough in this case. I do not think that, in this transaction, we need to do a lot of financial assessment of the buyer.

The target

Phoenix makes available life insurance products in the United States. It is very old player in the industry, founded in 1851, and is headquartered in Hartford, Connecticut.

Its net income results in the last two years were not good at all due to the declining interest rates and some regulatory changes in the country. The annual report explains this problem in the following fashion:

Source

Obviously, the profitability of the company is not at this time. Let me select some financial ratios (you can see more here):

- Return on Assets: -0.47%

- Return on Equity: -63.10%

This bad result seriously damaged the performance of the stock. You can see an important decline prior to September 2015.

PNX Chart

PNX data by YCharts

However, I do not think that this is the end of its business. According to the same report, the company has experienced growth. Please have a look at the following figure:

Source

As per my opinion, this insurance company is doing a great job, but the current economic context is not helping. The levels of liquidity declined sharply in recent times. Thus, the company needs more capital and it has to drastically reduce expenses. Please have a look at the following slide:

Source

Resultantly, the merger is a great idea as it will capitalize the firm. In the M&A presentation, the companies reported that the target needs the capital that the buyer will bring ($100 million). It is "a critical component of insurance regulatory approval":

Source

The transaction

The merger is subject to some customary conditions that you can read in the following image:

Source

The transaction was approved by shareholders on December 17, 2015. The other regulatory conditions are still pending, but I do not think that they will take a long time as this company is a small target. In addition, the authorities know that the company needs the merger to survive.

There are some interesting facts that force me to think that the merger process is very advanced. Firstly, the CFO announced that he will leave the company once the merger is closed. Secondly, the company started a Consent Solicitation relating to its 7.45% Quarterly Bonds on January 7, 2016. You can find this announcement in the following links:

- The Phoenix Companies, Inc. Announces CFO Transition Upon Completion of Merger with Nassau

- The Phoenix Companies, Inc. Announces Consent Solicitation Relating to 7.45% Quarterly Interest Bonds Due 2032 in Connection with Proposed Acquisition by Nassau.

I would like to add that bond holders' approval is not a condition. The merger agreement (that you can read here) says:

"Consent Solicitation for Indenture Amendment. Phoenix must, at Nassau's sole expense, use its reasonable best efforts to amend the terms of Phoenix's indenture for its 7.45% senior unsecured notes to replace its public filing obligations with reporting obligations more appropriate for a privately held company. Phoenix intends to solicit its bondholders in order to amend such indenture."

Source

There is a condition in the agreement relating to this bond (the default):

"no event of default (as defined in the merger agreement) under the indenture with respect to Phoenix's 7.45% senior unsecured notes and no performance default has occurred that continues as of the Condition Satisfaction;"

Termination fees

The termination fee is very large, which is very good. The target may pay a total amount of $10,300,000:

"We will be required to pay Nassau a termination fee equal to $10,300,000 in the following circumstances..."

Source

Closing of the merger and conclusion

The merger will close, according to the merger agreement, no later than the "10th business day following the day on which the conditions to its completion have been satisfied or waived." This is a key thing to remember. Once this has happened, the spread will be extremely small and my readers and some other savvy individuals will make profit with no risk.

Overall, this is a very interesting merger. The current stock price is $36.46 and the buyer will pay you $37.5 very soon. Furthermore, the transaction risk is small since the target is small. The transaction is a necessary move and the buyer has a lot of financial resources. Undoubtedly, it is a perfect deal.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I did not initiate positions in this stock, but I am trying to buy at a competitive price.

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Tagged: , M&A, , Life Insurance
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