Odd-lot Opportunity In McKesson's Exchange Offer
Disclosure: Long
On Wednesday, McKesson initiated an offer to exchange $107.53 of Change Healthcare (NASDAQ:CHNG) shares for every $100 of McKesson (NYSE: MCK) shares tendered.
There’s a 7.5% profit built into this transaction to entice shareholders to participate. Why? McKesson wants to monetize its Change Healthcare stake and repurchase its own stock with the proceeds. It’s hard to sell 176 million shares without affecting the market price, so McKesson opted for an exchange offer.
In 2017 McKesson and Change Healthcare Holdings (“CHC”) formed a joint venture called Change Healthcare. McKesson owned 70% and CHC’s shareholders owned the remainder. In June Change Healthcare IPO’d at $13 per share. Today, it’s up to $16 per share and McKesson wants to sell.
Here are the details:
McKesson will exchange up to 175,995,192 Change Healthcare shares for McKesson shares.
McKesson will exchange at most 11.4086 shares of Change Healthcare for each of its own. If this upper limit is in effect, you will receive less than $107.53 for every $100 of shares tendered. Here is the indicative exchange ratio.
The offer expires at 11:59 p.m., New York City time, on March 9, 2020.
The transaction is not expected to be taxable to U.S. citizens.
Stockholders who beneficially own “odd-lots” (fewer than 100 shares in the aggregate) of McKesson and who validly tender all their shares will not be subject to proration.
That last point is key. Most likely, this deal will be oversubscribed. To avoid proration, tender no more than 99 shares and tender all of your shares.
There are a few risks to be aware of:
McKesson could cancel or amend the offer.
Watch the indicative exchange ratio. If it hits the upper limit, the built-in 7.5% profit will diminish and could erode completely.
Your position is subject to market risk between when you buy McKesson shares and sell Change Healthcare shares. The 7.5% margin of safety helps guard against loss, but crazy things can happen.
To take advantage of this, buy up to 99 shares of McKesson and tender them before March 9th. Today that costs $16,625. If the deal closed today, without the upper limit in effect, your 99 shares would turn into 1,115 shares of Change Healthcare worth $17,875 at $16 per share. Your profit would be $1,250 or 7.53%.
Though this is a short-term trade, McKesson looks like a compelling long-term investment. We recently wrote up our thoughts in a blog titled McKesson: Does Valuation Offset Uncertainty?. You should check it out.
Do you have questions or comments about McKesson? Drop us a line. We’d love to hear from you.
Disclosure: The author, Eagle Point Capital, or their affiliates may own the securities discussed. This blog is for informational purposes only. Nothing should be construed as investment advice. Please read our Terms and Conditions for further details.