Tropicana: Value Still Left On The Table

Summary

• Icahn is offering $38 - $45 for 82% of the Tropicana shares he still does not control.
• Price will very likely be priced at the upper limit for a 3.7% return in three weeks.
• Special Situation Digest: our new marketplace service is on the way. Launch in early September.

Before we present the details of this investment, an apology is in order for the lack of activity on Seeking Alpha. We have been quite busy with some changes on Antão Capital’s structure and - more interestingly to the audience here - preparing the launch of our Special Situations Digest marketplace service here on Seeking Alpha, a place we hope to build to become the go-to place for ideas and discussion on the highest quality special situations available on the market. The launch will happen on early September, so stay tuned.

Now, on to the special situation du jour.

The following situation stems from our Tropicana Entertainment (OTCQB:TPCA) idea (Tropicana: Buy It While You Can) presented back in April.

At the time, we concluded our write-up saying that “We only see one possible outcome for Tropicana: to be taken private by Icahn”. Well, that was precisely what happened: on 23 June Icahn Enterprises IEP (Icahn’s investment vehicle) and Tropicana commenced a tender offer to purchase up to 5.58M shares of Tropicana in a modified Dutch auction for a minimum of $38 and maximum of $45 per share with the tender running through August 2.

If you followed our idea back in April the outcome has been a juicy ~40% return in roughly 2 months. The good news is that there is value still left on the table.

For context, Tropicana is an owner and operator of eight regional casino and entertainment properties, including lodging, dining, retail and entertainment. It has a very healthy balance sheet and has been experiencing nice growth. It is already 72.5% owned by IEP and Icahn is looking to take it private, firstly using Tropicana’s own money through buybacks and now through a tender offer.

Since the consideration for the tender offer is $38 to $45 and the stock is trading for $43.40 at time of writing, there is a possibility of a 12% loss if the tender would be priced at $38. We believe that is very unlikely and actually view the price being set at $45.

At this point it is important to understand how the auction will work: the price will be set at the lowest figure within the interval at which shares will have been tendered that will enable the purchase of the maximum amount of shares up to the 5.58M limit.

If more shares are tendered than those the acquirer is set to buy there will be a proration of the tendered shares, meaning that only a certain percentage of shares will be acquired.

Our conviction is that shareholders tendering their shares will be reluctant to accept a price lower than $45, especially given that Icahn himself discloses Tropicana’s fair value (page 18 here) to be $48.27. Shareholders are also aware that Icahn is highly incentivized to buy them out and if this tender fails there is a high likelihood that another one with better terms will be presented.

Now, if one is to believe that the tender will be priced at $45, as we do, what is the best way to invest in this situation?

There are two ways of looking at this: the safe way and the slightly more risky - albeit quite safe as well - way.

The safest way is to acquire 99 shares of Tropicana and tender them. This is because there is a fairly common clause on the offer stating that there will be no proration for holders of 99 shares or less, which means that all 99 shares will be tendered. In this case, and considering a $45 price, the upside would be 3.7% for a capital tie up of 3 weeks (~95% annualized return). This is similar to our Vestin Realty Mortgage II (OTC:VRTB) idea (A Micro Special Situation Yielding A 17% Profit Potential).

The alternative is our preferred option: buying a full position disregarding the proration threshold. With this option, the tendered shares would have the returns stated above (3.7% absolute, 95% annualized). The non tendered shares would be subject to market price.

At this point, it is important to ponder 2 variables: the percentage of shares not accepted in the tender offer and their market value afterwards.

Considering that the offer is being carried out for 5.58M shares and that 24.63M shares are outstanding (of which 17.84 already belong to Icahn), more than 82% of outside shareholders would have to tender for the offer to become over-subscribed. This means that there is a high likelihood of the offer being undersubscribed and all shares being tendered without any proration.

Even if a proration would occur, the percentage of non tendered shares would be quite low which means that only a small portion of the position would become subject to market price. In that event, we see a second tender offer to be highly probable (usually this happens at least at the same price of the last tender offer) or shares will tend to converge to Icahn’s assessment of fair value of $48.27.

In conclusion, we see this situation as an opportunity to make a decent return on a very small time frame with limited downside.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long TPCA. 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.