XBiotech Is Trading Below Its $30 Offer Price For Good Reason, But It Still Could Rise

Summary

• XBIT has risen to around $25 but still sits 20% below the minimum bid price of its recently announced partial tender offer between $30 and $33.
• Shareholders buying or holding at $25 and tendering their shares at $30 can expect at least 38% of their shares to be purchased in the tender offer.
• XBIT will have approximately $12.70 in cash per share once the offer is closed. Other assets may push its value to around $15.
• There is a strong possibility of a short squeeze prior to the offer closing.
• In absence of a short squeeze, shareholders may be able to expect a higher percentage of their shares successfully purchased as some shares won't be tendered.

On Tuesday, XBiotech Inc. (NASDAQ:XBIT) rose 31% to $24.33 after the company announced that it intends to proceed with a partial tender offer of its shares in the $30 to $33 range for $420 million. It followed that up with another green day on Wednesday to close at $24.94, which is still a 20% discount to the minimum proposed bid price. The smart people who made most of the money on XBIT were those who bought and held the stock immediately after the Janssen deal was announced in December when the company disclosed that a deal of this nature was coming. But there still may be some money to be made on XBIT over the next month until the tender offer closes.

Why is XBIT trading at such a discount?

On first instinct, one may be confused as to why a stock that is receiving a minimum $30 tender offer is only trading at around $25. The simple answer being that this is only a partial tender offer. Someone can buy at $25 and be guaranteed that a third of their shares will be purchased at $30 but once the offer closes, the other two-thirds of their holdings will be subject to the market price. However, there is a possibility that not everyone will tender their shares. If somehow only 30% of XBIT's 42,365,250 shares are tendered, one could conceivably buy the stock at $25 and get a payout of $33 for all of their shares, a 32% return within a month. But this is a pipe dream.

Reviewing the term sheet filed with the SEC, three members of management - CEO John Simard, CSO Sushma Shivaswamy and VP Queena Han - along with Board member W. Thorpe McKenzie intend to tender a combined 11 million shares. So it is almost guaranteed that the shares to be tendered

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