This low-risk inventory might return 7.53% in three weeks


On March thirteenth, Cummins will provide you with $107.53 of worth for each $100 of Cummins inventory. It’s a 7.53% return in lower than a month.

It’s often called an odd lot tender supply and one of many solely methods a smaller investor has a bonus of institutional buyers.

However what’s an odd lot tender supply?

A tender supply is a bid to buy a shareholder’s inventory and an odd lot is when you will have 1 – 99 shares. A spherical lot is when your variety of shares is evenly divisible by 100 – so 100, 200, 300, and so forth.

Thus, an odd lot tender supply is when an organization presents to purchase again its personal shares with a separate provision for these with “odd tons,” or lower than 100 shares. These could be referred to as odd lot buybacks.

Generally, an organization doesn’t make a agency supply however as a substitute conducts a Dutch public sale to determine a value. A Dutch public sale is when the worth begins excessive and is lowered till the variety of bids meets the variety of shares the corporate desires to purchase again.

Lastly, an organization solely desires to amass a sure variety of shares. If the supply is oversubscribed, which is when the variety of shares exceeds what the corporate desires, they’ll pro-rate what number of shares every shareholder can promote. They typically make exceptions to odd tons as a result of they’re so small and that is the place you are available.

I’ve been studying about odd lot tenders for fairly a while, normally as a result of Jonathan at My Cash Weblog writes about them (the newest includes Cummins and Atmus Filtration), however I’ve by no means participated.

At this time, I simply may.

Desk of Contents
  1. What’s the Cummins & Atmus Filtration Deal?
  2. What Are The Advantages?
  3. What Are The Dangers?
  4. How Do You Settle for The Tender Supply?
  5. Why Do Firms Do This?

What’s the Cummins & Atmus Filtration Deal?

Cummins (NYSE: CMI) spun off Atmus Filtration (NYSE: ATMU) however nonetheless owns 80% of ATMU’s inventory.

They’d wish to personal much less, in order that they’re providing $107.53 of ATMU for each $100 of CMI inventory. There’s no Dutch public sale on this one, simply a proposal.

The higher restrict is 13.3965 shares of Atmus Widespread Inventory per share of Cummins Widespread Inventory and there’s no decrease restrict (no minimal alternate ratio).

Earlier than the market opened on February twenty sixth, Atmus shares have been valued at $22.81 and CMI inventory was valued at $263.97. That’s a ratio of 11.57 so we’re nonetheless below the higher restrict.

  • What’s the tender supply? Get $107.53 of ATMU for each $100 of CMI
  • What’s the higher restrict ratio? 13.3965 shares of ATMU to CMI
  • What’s the decrease restrict ratio? No decrease restrict.
  • When is the expiration date of the supply? March 13, 2024.

What Are The Advantages?

The advantages are that you just personal an odd lot, you settle for the tender, and also you obtain $107.53 of ATMU inventory for each $100 of CMI inventory. That’s a 7.53% return in lower than a month.

If you happen to purchase 99 shares of CMI at $263.97, that’s a complete worth of $26,133.03. You’ll get ~$28,100.84 of ATMU, for a acquire of $1,967.81.

When you get the CMI inventory, they’re yours to do as you would like. You possibly can promote the shares or maintain onto them.

Since odd tons max out at 99 shares, that is normally engaging to smaller buyers or monetary advisors who wish to make the most of this arbitrage alternative to offset charges.

What Are The Dangers?

The largest danger, although extraordinarily uncommon, is that the deal is withdrawn or terminated. This hardly ever occurs however is feasible. There are a number of circumstances through which the supply might fail to undergo. The most definitely (and that is extraordinarily unlikely) one is that if there should not sufficient shares being bought again (not sufficient ATMU inventory being bought to CMI). One other one is that if they obtain “an opinion of counsel that the alternate supply will qualify for tax-free remedy to Cummins and its collaborating stockholders.” (from their press launch)

If this occurs, the inventory will seemingly go down. A number of the shareholders have been solely proudly owning it for the odd lot tender supply, so these buyers will promote their shares.

The deal might be prolonged. The present deadline in March could also be prolonged for no matter cause and this would cut back the overall return from the deal for the reason that holding interval is elevated.

The following danger is that the respective inventory costs transfer in such a method that you just now exceed the higher restrict ratio. If you happen to exceed the higher restrict ratio, the quantity of ATMU inventory you get in your CMI inventory will go down. Your 7.53% premium will get smaller.

After that, the subsequent greatest danger is that the inventory costs go down after the sale (it most definitely will go down). All these ATMU shares that have been in CMI coffers at the moment are in shareholder palms. A few of these shareholders have been solely in it for the arbitrage alternative in order that they’re promoting the second they get the shares.

The one query is whether or not this stress can be better than the premium.

What’s good about odd lot tenders is that you just don’t have to fret in regards to the danger of pro-ration – since odd tons should not topic to pro-ration.

How Do You Settle for The Tender Supply?

As a matter of protocol, when you personal an odd lot and don’t settle for the tender, you’ve successfully declined it. It’s a voluntary company motion. If you happen to miss the discover and don’t reply, you’ve successfully declined it. (company actions which might be obligatory are mergers, inventory splits, spin offs, and so forth.)

The deadline for the CMI/ATMU supply is March thirteenth however some brokerages may have you to reply forward of that date.

Let’s say you personal an odd lot of an organization that has made an odd lot tender, how do you go about accepting it? This can differ from brokerage to brokerage. Some could have a approach to do it on-line, others would require you to name in.

In Vanguard, there’s Company actions menu in your brokerage account view:

This opens a window the place you may reply to Voluntary company actions:

As of this writing I don’t personal any shares of CMI so there are not any company actions to point out.

When you settle for the supply, you’ll seemingly get the shares of ATMU about 7 enterprise days after the deadline.

Why Do Firms Do This?

There are a number of causes. For some, they wish to cut back the variety of shareholders.

Generally an organization owns a big portion of one other firm, both by spinoff or another motion, they usually wish to make the most of it to enhance their share value. In 2023, Johns & Johnson (NYSE: JNJ) spun off its shopper staples unit, Kenvue (NYSE: KVUE), and held 90% of the corporate. J&J provided to purchase again its inventory utilizing shares of Kenvue, slightly than money and did so at a 7.5% premium. For each $100 of JNJ it bought, it could give the shareholder $107.53 in KVUE inventory.

Regardless of the cause, the beneficiary is you, the smaller investor, as a result of you may (probably) earn a fast premium.

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