Why Investors Should Vehemently Reject Teekay LNG's Proposed Take-Under Offer
Summary
- Low-ball take-under offer at $17 per unit - just as energy-related stocks have started to move.
- TGP’s management is rewarding shareholders’ loyalty and patience since 2014 by insulting their intellect and stripping them of significant potential upside.
- TGP unitholders have not just a right to vote down this attempted take-under, but in our opinion, a duty to do so.
Don't let TGP ship away for a ridiculous $17/share.... alvarez/E+ via Getty Images
For the last few years, being an owner of Teekay LNG (“TGP”) - or any of the other TK family entities for that matter - has not been a lot of fun. There is no need for us to detail here the catalog of errors & capital misallocations made by management and disasters experienced by the companies since 2014 - these have been well covered by other authors on Seeking Alpha and other public forums.
However, yesterday’s announcement that TGP had agreed to accept a (ridiculous) low-ball take-under offer at $17 per unit - just as energy-related stocks have started to move (after being in hibernation since 2014), and just as extreme natural gas prices in Europe and Asia are reminding the world of just how important LNG transportation is and will continue to be - may well be one of the worst decisions made not only by TGP’s management but in the broader history of capital allocation decisions.
The question for any TGP shareholder should be: “what will happen to current management in the unlikely event this take-under succeeds?”. May it be possible that they have been proposed generous financial packages for getting this deal done as cheaply as possible? Asking for a friend…
While TGP’s track record speaks for itself, the magnitude of how wrong this decision is can only be interpreted as comical. By accepting the offer, TGP’s management is rewarding shareholders’ loyalty and patience since 2014 by insulting their intellect and stripping them of significant potential upside that has only now started to materialize.
Luckily for unitholders, the deal requires a 50% vote to pass, and even though TK has indicated that they will vote their 41% stake in favor, there is still a chance for other holders to stand together and reject this opportunistic approach.
TGP unitholders have not just a right to vote down this attempted take-under, but in our opinion a duty to do so. To preserve the value of their investment, to enjoy the likely upside that is just around the corner, and to remind management teams and directors at TGP and beyond, that the people who own their companies - and are therefore their employers - won’t let themselves be steamrolled by such a ridiculous offer.
TGP and the $17 take-under price
In January 2018, we sent an email to the Investor Relations team at TK alerting them of our frustration with the poor decisions they had been taking, and the damage we felt that it was doing to their unitholders. An extract from this email is below:
“There are several kinds of capital allocators:
1. The ones who have balls at the top, and balls at the bottom of the cycle – interesting but not for the faint of heart…
2. The ones who have balls at the bottom and are careful at the top of the cycle – ideally what one looks for (sadly doesn’t look like what TK is doing)
3. The ones who never have balls – these ones never really manage to become anything, so we won’t even consider them
4. The ones who have balls at the top and are pussies at the bottom – these ones are the worst… as they will completely destroy long-term value due to their inability to read the cycles and to think outside of consensus…”
Fast forward more than three and a half years to today and we fear that yesterday’s announcement that TGP had agreed to sell itself for a derisory price is conclusive evidence that TK’s management team belongs to the kind of capital allocators that we “prophetically” described in #4 above.
TGP has been undervalued for a long time - and the shipping sector is full of deep-value names whose depressed valuations are at least in part due to the dreadful reputation the industry has for poor treatment of shareholders and unitholders, bad capital allocation, and in the last year, low-priced sales of companies to Private Equity by feckless executives and boards.
The ESG wave didn’t help these old economy “polluters”, but the point of the recent sea of change that we have started noticing recently is that ESG has completely shot itself in the foot by misallocating capital away from fossil fuels, and the investment community is now starting to realize that we may well end up with a commodity supercycle as a result. We are not against ESG, but we are very much against the “green washing” which is what most ESG investing is about, and as such we have believed that oil & gas will see the biggest super-cycles ever this decade. TGP was one of our ways to play it. Until yesterday, when TGP management rushed to anchor the share price before it shot up, as it was starting to catch-up a bid from the changing tide around commodities...
Over the last couple of years, TGP’s management has taken a series of positive steps to make the units more attractive to investors:
- It focused on growing the distribution
- It dipped its toes into buying back shares (albeit timidly) converting from a K-1 to a 1099 filer
- It cleared out the IDRs
While we appreciate the efforts, the reality is that those efforts are yet to be reflected in TGP’s share price. But management seems to continue to act out of fear, which, as we wrote in our 2018 email to the IR team, “is the perfect recipe for sub-optimal future returns, some of which you just locked-in today.”
A deal at $17 per unit represents a significant discount to the value of TGP’s shares today, and an even wider discount to the value that we expect to emerge as the company:
(1) continues to deleverage,
(2) as energy stocks re-rate to reflect a global economy hungry for cleaner alternatives to other fossil fuels, and
(3) as the controlled and sensible growth plans that TGP management has been talking about for some time start to come through and be reflected in the share price.
Management’s justifications for accepting the take-under offer are silly, and directly contradict what they have told shareholders in the recent past.
- The price at which TGP is proposing to sell the company is too low. We believe that TGP is worth at the bare minimum $20, based on a 2021 EV/EBITDA multiple that recognizes the stability of cash-flows underpinned by the deep contract backlog, quality of assets, and blue-chip counterparties.
- As deleveraging continues according to plan, and without making wildly optimistic assumptions about vessel re-contracting, a $25 price target is quite likely over the next couple of years. That’s 47% higher than the current offer and 60% higher than TGP’s closing price on Oct 1, 2021. We see little reason to leave that upside on the table, and so should every other investor.
- While management will surely claim that the $17 take-under price is fair and reasonable, shareholders should remember that this is the same management team that in late 2019 - when the company was carrying higher leverage, had not yet completed its program of shareholder-friendly reforms, and didn’t have the benefit of today’s red-hot gas market - was suggesting a potential price of $30!
Source: TK Group Investor Day Presentation, 14.11.19
- In fact, even a brief examination of the materials published by TGP over the last couple of years reveals that management surely knows that the company is worth well in excess of $17 per unit.
- On November 14th, 2019, TK reminded investors that TGP was then undervalued. On that day, TGP traded as high as $16.64.
Source: TK Group Investor Day Presentation, 14.11.19
- It would be absurd to suggest that when TK management informed the market that TGP was trading at a discount what they really meant was ‘it is trading at a discount to intrinsic value of 2.1%... and the intrinsic value will increase in the future but somehow pause at 2.2% above today’s discounted price’.
- We would not be gentlemen if we were to suggest that management were somehow confused when they made this claim - they knew exactly what they were saying, and in any case, the company is now stronger, the LNG market is hotter and there are a lot more USD in circulation today than back in 2019... Therefore, the logical conclusion that we must make is that something is clearly wrong with the take-under price.
- In the same presentation, management boasted that the 8.2x EV/EBITDA multiple at which the company was trading was “compelling” for potential investors.
Source: TK Group Investor Day Presentation, 14.11.19
- The most recent EV/EBITDA calculation presented by management (in the Q2 2021 presentation) uses an EBITDA figure of $735.6mn (based on H1 performance).
- Future EBITDA may vary - but if this is the EBITDA figure that the management team is choosing to promote to investors, then it is only fair for us to hold them to it.
- Using this figure, and the $6.2bn EV number that management presents in the take-under press release, they are selling out shareholders at an EV/EBITDA of... 8.2x!
- Somehow, in the minds of TGP management, an 8.2x multiple is both “compelling” for shareholders to buy at… and an “attractive valuation” for them to sell at. This is very silly, and not something that TGP management should expect intelligent shareholders to be willing to swallow.
- Management also boasted about the cheapness of TGP shares by comparing the book value of TGP’s JV investments to its share price.
Source: TK Group Investor Day Presentation, 14.11.19
- While the value of the JVs today is not exactly the same, there is no indication in any of TGP’s filings that they have somehow fallen into a black hole, or been eaten by Godzilla, or anything like that…
- And yet when TGP management is trying to sell our units, they want to accept $17, and this “significant value” in the JVs - more than $14 per unit in 2019 - about which management was so keen to boast is being sold for free.
- Only 10 months ago (on November 12th, 2020) when the market was materially softer than it is today, TGP management argued that TGP represented a “compelling investment” on the basis that it was trading at an “8.3% distribution yield, covered 2.4x by earnings”.
Source: TGP, Q3 2020 Presentation
- And yet today, the same management team is claiming that selling the company at a distribution yield of about 7% (better, but only slightly…) somehow represents “an attractive valuation” for unitholders to sell at.
Source: TGP, Press Release 04.10.21
- The absurdity of this claim is highlighted by the fact that according to TGP’s own reports, the take-under price represents a trailing 12m distributable cash flow yield of 21.9%.
- While we are not so naïve as to take the DCF figures reported by MLPs very seriously, this is a metric that TGP management has reported consistently over the years, and which they have often highlighted in the opening slides of their investor presentations.
- If they want to report it and highlight it to investors, then they must stand by it. By management’s own metric, they are attempting to sell out shareholders at a 21.9% DCF yield.
- Later in the same presentation, management argued that TGP was “attractively priced” for investors at 5.0x 2020 earnings.
Source: TGP, Q3 2020 Presentation
- And yet, less than a year later, and in the context of a far healthier LNG market, management thinks that investors will believe that a sub-7x multiple on these same 2020 earnings is somehow “attractive” for shareholders to sell at. This is nonsense.
- Perhaps the most egregious claim made by TGP management in connection with the proposed take-under is that it offers shareholders “immediate liquidity”:
Source: TGP, Press Release 04.10.21
- Very few shareholders in TGP own stakes larger than a few percent. If shareholders in a large and liquid publicly traded company like TGP wanted liquidity, all they needed to do was to simply sell their shares.
- In fact, had shareholders wanted liquidity at $17 per unit, they could have had it as recently as September 11th, 2021. As far as we can tell, there were no substantial changes to the shareholder register on that day, and while volumes were elevated, they hardly represent a turnover of large parts of the shareholder base. When shareholders had a chance for “immediate liquidity” at $17, they said “no”.
It seems clear from TGP’s own recent disclosures that $17 per unit is far too low a price, especially when we are on the cusp of LNG become an even more important part of the global energy system:
The long-term upside for LNG demand is real and about to significantly accelerate.
Source: TGP 1Q’21 Earnings Presentation
The amount of noise being made by the press on energy shortage in Europe, UK and China is the initial testament to how important sources of energy like natural gas are, which is then being reflected in sky-rocketing natural gas prices.
Lastly, current US LNG export increase is a reflection of how carriers like TGP are vital infrastructure assets that are needed to face energy shortages on a global scale in a world that has vastly underestimated the need for natural gas.
Source: Energy Information Administration
Conclusion
This comprehensive list of contradictions which we’ve assembled above leaves us with two possibilities:
- Management either thinks that TGP’s shareholder base is fundamentally stupid, to the extent that they do not care about making appropriate returns on their investments, or
- Management is so naive and ill-informed (and we’re trying our best not to use inappropriate language here) that they would sell TGP at a significantly discounted valuation right before the best market conditions it had in several years start to materialize, or most likely
- Management is being promised a lot of money to go back on a growth capex binge and is tired of managing a balance-sheet constrained entity, where they cannot enrich themselves as they see others around them do… The only problem is that the constrained balance sheet is a consequence of this precise management team being horrendous capital allocators and having almost bankrupted the company back in 2014/15.
Shareholders have been incredibly patient with this management team over the past 7 years. Do not test our patience even further. If TGP management had a remaining ounce of character and integrity they would at least have offered their shareholders part of the incredible upside we see in the supercycle that is just getting started.
Wrong decisions are part of the game of financial markets and life in general. But do not confuse wrong decisions with bad decisions. There is plenty of information publicly available and summarized above to prove that accepting such a low price for TGP is certainly a bad decision, and arguably an ignorant one.
We are of the opinion that management’s behavior not only insults its shareholders’ base but effectively takes advantage of them. Whilst we do not believe for a second that management sees the $17 price as reasonable (independently of what they publicly say), it seems likely to us that they have chosen to partner with an institution that can shower them with money instead of rewarding the loyalty of all the shareholders who stood by them for the past several years.
Management’s strategy is simple: they have accepted a low-priced offer to bring risk arbitrageurs into the shareholder registry. Investors (we used to be one of them) who come into a deal just for a bump in price and then they sell because they have no dog on this fight. A message to our fellow Risk Arb friends: be careful! This is not a done deal just yet. Not until TGP management tables an offer that is deemed acceptable. We are more than happy to keep TGP public.
On the back of this, we’ll likely see slightly higher prices behind thrown around in the hope that “the anchoring effect” of the $17 price will make investors accept $18 or $19 offers.
This is a common strategy used within the corporate capital allocation world and one that hopes to obfuscate the obvious: that anything below $25 per unit is simply wrong given the current market fundamentals and TGP’s clear potential for deleveraging.
As shareholders, our duty is to:
- Vehemently reject the ridiculous offer of $17 per unit.
- Urgently request an EGM in order to replace TGP’s current management team.
- Wait to see if bids come in at more reasonably priced levels and, if not, patiently enjoy the long-term upside of TGP as a public entity that has just started to materialize.
There is almost 50% return that, in our view, shareholders would be purposefully giving up if they do not cooperate to reject the $17 price offer. We will do everything in our power to block that, and should you want to work with us do not hesitate to send an email at pedro@nostercapital.com.
Regards,
Pedro
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of TGP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (111)
that are so far away from the final numbers in order to convince whoever
they needed to (conflict committee) in order to be rewarded with the
extra units. the point is that they chose to provide information that (on its
face) was not true. they were in the process that ended up in this
transaction, so they probably knew they were misleading. discovery
should show that.
some of their holdings plus part of the gp to a financial investor. there
is something else here which is probably having to do with what they
think is an opportunity elsewhere to invest half the proceeds plus they
have more confidence now in the prospects of tnk and in the future
of the single fpso they have. no longer do they need tgp.