After my post on The Singapore Fund tender offer a reader pointed me in the direction of the White Mountains Insurance Group (WTM). The company announced on February 23, 2012 that it is commencing a self-tender for 1,000,000 shares, 13 percent of the outstanding stock, at a price of 500 dollar per share. And if more shares are tendered the company has the right, but not the obligation to buy an additional 2 percent of outstanding shares. Just like the SGF tender offer holders of small positions are not prorated, a quote from the SC TO-I filing (a must read if you want to participate in an offer like this, since it contains all the details of the deal):

If you own beneficially or of record fewer than 100 Shares in the aggregate, properly tender all of your Shares and do not properly withdraw them before the Expiration Date, and complete the section entitled Odd Lots in the Letter of Transmittal and, if applicable, in the Notice of Guarantee Delivery, we will purchase all of your Shares without subjecting them to the proration procedure.

This clause creates an opportunity for the small investor that is impossible for the big players to exploit, and because the share price of WTM is actually almost $500 you can still create a sizable position. The stock is up 1.66 dollars today and trading at 497.97, already halving the potential profit from ~365 dollar to ~200 dollar. Still not bad if it would be risk free, but there are various conditions to the offer. Most of them are not really a problem, for example the company reserves the right to cancel the tender offer if it would result in the company being delisted from the NYSE. A bigger issue is this:

there shall have occurred any decline of more than 10% in the market price for the Shares or in the Dow Jones Industrial Average, New York Stock Exchange Composite Index, NASDAQ Composite Index or the Standard and Poor’s 500 Index, as measured in each case from the close of business on February 23, 2012;

So by participating in this tender offer you still have market exposure in case there is a more than 10% drop, and if you wanted to hedge this exposure you would lose almost all of the potential profits. SPY put options that expire on March 30, 2012 (the offer expires March 22) with a 123$ strike cost ~30 cent. You need 4 of them to reasonable hedge your market exposure for a total cost of $120. That leaves very little room for profit especially considering SPY puts would be a poor hedge, and there are still other risks and transaction costs as well.

Conclusion At current prices it doesn’t seem attractive to try to profit from this tender offer, but the company itself might be worth investigating. It has a very strong balance sheet, is using part of the big cash balance to buy back a meaning full part of the company, insiders are not participating in the tender offer, and the company is trading at just a 5.1x PE.

Disclosure None

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