Pampa Energia's Attempt To Squeeze Petrobras Stub Holders Fails. 8.5% Merger Arb Now Available

| About: Petrobras Argentina (PZE)

Summary

Pampa Energia acquired 90% Petrobras Argentina through a tender offer.

Pampa attempted to shortchange stub (remaining 10%) shareholders with a below market/previous transaction offer.

The Argentinian government stepped in and Pampa will now pay the same as original consideration.

We have a very interesting transaction in LatAm world.

In May, Pampa Energia ("Pampa") (NYSE:PAM) announced the acquisition of Petrobras Argentina ("Petrobras") (NYSE:PZE).

It began the tender process in October and it closed on November 15. I initially became interested in the process in early November because I saw a relatively low risk (or so I thought) merger arb opportunity with ~7.5% return for buying Petrobras and tendering my shares and exchanging for Pampa. Pampa offered 0.2101 shares of Pampa ADS for each share of Petrobras. On November 1st, Pampa closed at $33.95, this resulted in a value to Petrobras shareholders of 7.13. With Petrobras at the time trading for 6.63, this offered a relatively low risk ~7.5% return in a short period of time.

Only 90% of shareholders validly tendered their shares to Pampa so the remaining shares continued to trade as a stub.

I, unfortunately, had a hiccup at my broker and my tender did not go through. I was left with a stub of Petrobras Argentina and the price immediately collapsed below $5. I was looking at a huge loss. I emailed the investor relations for Pampa to see what would happen with the stub and it said something to the effect of "while we cannot offer you the same consideration, we will be making an offer to purchase the remaining Petrobras shares based on their most recent trading levels". I was shocked and confused that it would treat the shareholders this way but my knowledge in Argentinian law was limited. I held on hoping something would change and then Pampa had a press release that it was going to acquire remaining Petrobras shares at a rate that was 30% lower than the original (0.3648 ratio for regular shares versus the original ratio of 0.5253)! I was floored and upset.

After two weeks, the Argentinian government stepped in and rejected this exchange ratio (12/20). On 12/23, the company and the government agreed to use the original exchange ratio as there had been no material change to offer a lower consideration.

I thought it was very interesting that Argentina operates roughly the same as the US but that a large company like Pampa Energia thought it could get away with very unfair treatment to minority shareholders.

Right now the ADR exchange ratio is the same original 0.2101 shares of Pampa per share of Petrobras.

(Share prices as of 12/23)

Pampa: $33.46

Petrobras: $6.48

Implied Petrobras value: $33.46 * 0.2101 = $7.03

Implied return = 8.5%

An 8.5% return with very little risk is great risk-reward in my opinion. This deal is confusing, international and small which is likely why it has not gotten more press and the spread is so large.

Please let me know if you have any questions.

I am personally NOT hedging this transaction by shorting Pampa alongside the transaction. I don't believe there are any options available for Pampa as well. If you can get borrow on Pampa shares at <10%, it would be a worthwhile hedge as you would take almost the entirety of risk off the table at minimal cost for a one month short.

I expect the transaction to close by the end of January at the latest so the overall time one would have to take Pampa share risk should not be that long.

Disclosure: I am/we are long PZE.

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 am long PZE may acquire more or may sell at any time.

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Tagged: , M&A, Argentina
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