United Rentals (URI) Stock Tender Offer: A Calculated Gamble

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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?

Quick Background
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. 😉

Personal Details
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.

More References
» 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.

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  1. Good Money Blog says

    Can you possibly hedge by buying puts/selling calls with a few bucks at Zecco?

  2. Colin Harrington says

    Why did you buy 99 shares and not round it out to 100 shares? 100 shares is a round lot.

  3. Good Money – Most likely, yes, but that would lower my upside as well.

    Colin – I did that on purpose to avoid pro-rating of shares in the case that more shares are tendered than URI is going to buy. This is highly likely given the ~10% premium. With 99 shares, I am guaranteed to have all of them bought assuming the tender offer stands.

  4. Colin M. says

    Don’t forget Uncle Sam’s cut of your $200 STCG… 100% taxable.

  5. Yep, short-term capital gains will be taxed as ordinary income just like everything else, include interest from banks. Of course, I may have some losses to carry over and negate the gains.

  6. What was the line about this from “When Genius Failed”?

    It think it was “picking up pennies in front of a bulldozer”. If the offer gets canceled, odds are the stock will drop quite a bit. Sounds like a large likelihood of a small gain with a small liklihood of a large loss.

    Which, as long as it’s your “fun money”, is fine. But these “arbitrage”-type deals are generally not the slam dunk you might expect.

  7. I am very interested in seeing how this goes. Thank you Jonathan for being the guinnea pig and letting us watch. I appreciate the lesson, either way the stock goes!!!! Please make sure to post the results of this experiment, and Good Luck!

  8. This stock already has cautionary story to tell about arbitrage.

    I also tendered quite a few shares of URI (at $23). I already owned these shares from trying arbitrage the stock many months ago when it was being acquired by Cerberus. . .for $34.50/share. That was one of the first big LBO deals to fail.

    On the upside, URI is actually a good company (some of the management aside). But the reason I bit on the first arbitrage play was that it seemed like the downside was limited. 14 points later. . .

    One might guess that the reason the stock is hovering around $20 is precisely because people are buying the stock for the arbitrage whenever the risk/reward gets attractive. Hard to imagine the stock going up afterwards (but I’m still not resetting my price lower either ways). Indications are their debt will likely get downgraded further after using cash to buy the stock, which means it’ll cost more for them to borrow in the future.

  9. The question I have is a slightly more technical one – how exactly do you tender your shares? I’m slogging through the letter of transmittal right now, but I could certainly do with some help 😉

  10. netanderthal says

    What im not clear though is how to participate in this auction.
    If we simply purchase the shares on the open market right now, how do we sell it back to the URI in couple weeks?

  11. First, you buy the shares.

    Second, you call your broker and say “I want to participate in URI’s auction” (maybe you have to wait until the buy has settled) You can’t do this on-line.

    Third, tell them how many shares and at what price you are willing to sell.

    Fourth, listen to the long list of disclaimers about how there is no guarantee that your order will go through, etc.

    Fifth, sit back and cross your fingers.

  12. Hmm.. for the brave of heart, this sounds like the perfect opportunity to buy a put option on the stock! If the price does fall (which seems to be the general consensus), you stand to make a decent gain. Of course if the price moves the other way, it wouldn’t be pretty…

  13. Justjoeguy says

    URI finished at $19.45 down 45 cents today. Average number of shares traded per day is 1.5 million. This company could easily depress the price of the stock by just selling a few hundred thousand shares each day until Friday. This is really just a gimmick stock. If you don’t lose big consider yourself lucky.

  14. There is a reason it is trading BELOW the tender offer.

    BTW 75% of all stocks go down in a bear market.

  15. Wow, you guys are really tough on Jonathan. This is a rather simple stock “workout” transaction. If you visit my blog, you’ll see that I’ve done dozens of this trades. There is some risk, but it is low and the percent return is relatively high. I’ve had several blow ups in my model real money portfolio, but my overall returns are still excellent.

    These unique arbitrage oportunities are a great way for an individual investor to take advantage of deals that institutional investors can’t touch. Think of it as picking up the loose change on Wall Street.

  16. To participate in a tender offer with broker-bought shares, you must contact your broker and let them know you wish to participate in the tender offer. You’ll need to tell them how many you want to tender, and for how much given the auction system.

    No, this transaction is not without risk. It is difficult to give a %. But the risk is smaller for small-time investors. Nobody on Wall Street will care about 99 shares and a $200 profit – that’s how much lunch just cost them. Owning 100+ shares is much more risky.

    URI tightened their guidance for 2008 today, which is was around analyst expectations if a little lower.

  17. Invest Money Lab says

    It sounds like a good money. But I usually do not like to act on news as it is a bit risky, I think. But I wish you success!

  18. Why not use TradeKing over Scottrade?

  19. There are 2 risks with this tender offer:

    1. They have an out to completing the tender offer if certain indexes the S&P 500,DJIA,NASDAQ,NYSECOMP
    fall by 10% from 6-16. This was actually trigerred intraday yesterday with the NASDAQ. I would imagine they will waive this condition as they did with the URI market price condition, inless there is an all out plunge in the indexes(we have 4 trading days left).

    2. They could pull the odd lot priority. This is very rare but it has happened in the past.

    That said i am playing this tender along with Jonathan.


  21. Ted Valentine says

    So after taxes you’re looking at like $125? Is the risk (the stock sinking, the offer pulled) worth that?

  22. Fred Mertz says

    The problem here is that there have been a decent number of stocks of late that have fallen apart after tender offers. HD, CVS and CHIC come to mind. Everyone tenders their shares, the company buys back about 1/3 of the float, people get 1/3 of their tenders bought back, the stock then falls as the positive catalyst of the buyback is in the rearview mirror. There are many people, most of whom are smarter than us, who spend their every waking hour dedicated to “risk arbitrage” trading. You’re not going to beat them at their game unless you have knowledge that you shouldn’t.

  23. Ted – Depends, you’d have to set a probability. If you have a 60% chance of earnng $100 and a 40% chance of losing $100, would you take it? What if it was 80%/20%? I know it’s not an easy question to answer, which is why I call it a calculated gamble.

    Fred – Exactly why I’m only buying 99 shares and trying to get them all cashed out. Nobody working in risk arbitrage will care about 99 shares; I am flying under the radar.

  24. Seems like a lot of energy and taxes to spend on a potential $200. Your maximum gain is 9.8%, before taxes and before figuring the cost of your reference ($100/year for Fat Pitch, divided somehow among all arbitrage deals you do).
    Why risk money when you have such a low ceiling to how much you’ll gain? It seems like you’d have to do a lot of these deals fairly quickly to make it worth it, and then you’d have to ask if it’s worth the stress and legwork.
    Having said all that, I’m very interested to hear your analysis after the 16th.

  25. Richard, I don’t see any reason for analysis after the 16th. It will either work or not. We will know that at 9am on the 17th.

  26. For me it took only seconds to place the trade and 5 minutes for the phone call. Not much energy spent there.

    Reading fat pitch, etc, is something that I enjoy anyway. Like reading blogs or bargain hunting forums or the wall street journal.

    One thing I dont understand is why did the company bother offering price above the market value? Couldnt they just buy the shares directly from the open market?

  27. Fred Mertz says

    It’s hard to buy that many shares without driving the stock price up unintentionally, Also, there are rules limiting the quantity of stock a company can buy back on the open market per day and there are restrictions limiting the time of the day they can do it.

  28. The July 16th deadline has passed, with no news, so it appears that this tender offer has gone through. Ideally, within a few days we will know the % of shares tendered, and within a week or 2 my 99 shares will be fully cashed out and my profit realized.

    Anyone else buy and tender 99 shares? or perhaps more?

  29. approximately 33.9% of the shares validly tendered at $22.00

  30. PR this morning. done deal. 22. Payment will be made after the 3 biz day guaranteed delivery deadline. That means look for cash about Wed or Thur of next week.

  31. Went in for 99, but the trade settled one day later than usually. I *might* have blown the deadline – no word from my broker yet, though.

    So we’ll see what happens. Was a really interesting article, overall – never thought about arbitrage plays before.

  32. I’m glad to hear folks are going to make some nice money with URI. I look forward to reading Jonathan’s final results. I’ll be sharing it with my readers, since it will give them a different perspective on odd lot tender offers.

  33. Thank you for the advice on the related risk vs. the potential rewards with regards to this stock tender offer for URI. Although you claim not to be an expert, the information and tips provided would have people reading this think otherwise. Good tips.

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