Yesterday, I bought 99 shares of United Rentals (ticker URI) stock for $19.81 per share, in the hopes that the company will buy it back from me next week for $22. Huh?
Sometimes companies choose to buy back their own shares for a variety of reasons. Often this is done via a Dutch auction process where each shareholder will indicate at what price they wish to sell (“tender”) their shares. The company will then start buying back starting with the cheapest price and going up until they get enough shares. If you indicate a higher price, you balance getting more money with the risk of having them not be sold.
United Rentals Details
URI is the largest equipment rental company in the world. In early June, United Rentals told shareholders that they wanted to buy back 27 million shares using a Dutch auction with a range of $22 to $25 per share. The offer period ends on July 16th. At the time, the stock price was only $19.50. You can find more in their Letter to Shareholders, part of a larger SEC Filing.
Risks and Rewards
The price of URI stock has been wavering recently between $18 and $21. Given that the $22 minimum offer price is currently a ~10% premium over the current market price, one risk is that too many people will tender their shares for $22, which means URI will only buy a partial amount of your shares. Your remaining shares may then drop below the price at which you bought. This risk is alleviated if you buy an odd lot of 99 shares, because according to their stated buying process your shares will be bought first.
Another related risk is that this tender offer will be canceled or amended. The company might lower it’s offered price. So then it becomes a fuzzy skill to “read between the lines” and make an educated guess as to how the management will handle this.
I am not an expert at this process by any means and am not recommending that anyone else follow my example, but here is why I think it will still happen:
- The day before the tender offer came out, the share price was only $19.50. With less than a week to go, the stock price is around $20. The stock has not plummeted or anything, but has been moving up and down with the overall market a bit. The picture remains about the same, so there is no new reason for them to change their minds if they haven’t already.
- The company had the ability to back out on this offer on July 1st (and technically every other day so far) based on one out-clause, but declined to do so.
- The current P/E ratio of the stock is only 6. It is not an overpriced growth stock, although it does have some debt issues. Most examples of fundamental analysis that I found have reported this company to be at least somewhat fairly valued.
- The financing for this deal appears to be taken care of already. So they don’t need to find anyone to lend them the money for this.
Again, I am primarily a passive index fund investor; I am not an expert in this area (not even average) and I do not consider this stock part of my portfolio. This more of a calculated gamble with a short-term resolution (offer expires July 16th), with the added bonus of learning more about stock markets in the process. I am always interested in learning more, and have been waiting for a good opportunity to try another one of these. (Kaizen!) Besides, you tend pay more attention when you have some skin in the game.
I bought my shares yesterday for $19.81 with a limit order set at $20 before market open. Upside: If all goes well, I will gain $216.91 (minus $25 in fees) with an initial investment of $1961.19. Basically I’m trying to make $200 while putting up $2,000. That is a return of 10% over what should take a few months. Annualized that’s still over 30%. Downside: The tender offer is canceled, and I am left with 99 shares of URI. I can either keep them and hope for positive return down the road, or I can sell them. If I really want to minimize potential losses, I can set a sell stop order.
Although I have an account with Zecco Trading (review) for my other fun money plays that has free trades, I decided to buy these with my Scottrade (review) account because I have used them for similar arbitrage transactions in the past and I have a few free trades left over from their referral program. I will need to contact Scottrade today and let them know that I wish to participate in this tender offer. I will be subject to an additional $25 fee for “non-mandatory reorganizations”. In cases like this, I like having a local branch to talk to so I can make sure things are done in a timely manner.
» Fat Pitch Financials Contributor’s Corner – An excellent resource for such arbitrage deals, but requires a paid subscription of $125/year (or $15/month). I recently bought a year’s subscription when it was still $100/year.
» Stable Boy Selections – His 7/8 post reminded me about this offer, which I had actually forgotten about.
» New York Times DealBook Blog – More discussion on the probabilities of this offer going through.