Merkado Barkada
September 26, 2024 | 8:00am
Filinvest Land [FLI 0.83, up 22.1%; 908% avgVol] [link] announced a creative plan to conduct a capped voluntary tender offer for its own FLI shares where payment is settled in Filinvest REIT [FILRT 3.11, up 1.6%; 93% avgVol] shares. Tendering FLI shareholders will receive 32 FILRT shares for every 100 FLI shares tendered (0.32:1 ratio). The total number of shares that FLI will accept through the tender offer is capped at 1,866,000,000, or 7.69% of FLI’s outstanding shares.
> What’s going on here? It’s an FLI buyback. It’s a crowd-sourced FILRT block sale. It’s both of those things at the same time. At the end of the day, FLI is offering its shareholders the chance to redeem their FLI shares for FILRT shares. It’s really that simple. A buyback will pump the value of FLI’s shares, and a block sale will get more FILRT shares into public hands to make room for any future property-for-share swaps.
> But why a tender offer? Doing this by tender offer, as opposed to just a traditional buyback, allows FLI to get a massive batch of shares off the open market all at once at a set price. It would take FLI more than a year of FLI’s average volume to buy up all those shares organically off the market, and that sustained manic buying would definitely drive FLI’s price up and would most likely make doing on the open market more expensive.
> Why is the tender offer capped? Capping the tender offer further controls the cost for FLI. They’re basically saying: “Anyone can sell us their FLI shares in this deal, but we’re only going to buy a maximum of 7.69% of the company back.” The market might have been confused by an uncapped tender offer, as that would send confusing signals. By capping the tender offer, FLI frames this as a combo play FLI buyback and FILRT block sale.
> Why pay with FILRT shares? Kills two birds with one stone. FLI gets to put 600 million FILRT shares into public hands, which will increase FILRT’s public float from 34.48% to 46.75%, and it gets to take 7.69% of FLI’s outstanding shares out of circulation in a cashless, one-time transaction. FLI has the cash to do this buyback the old-fashioned way, but that wouldn’t address FILRT’s public float issue and it wouldn’t cap their potential costs on the buyback. This transaction isn’t dilutive for FILRT shareholders as the “FILRTbux” that FLI will use as payment are just secondary FILRT shares that are already owned by FLI. There are no new/primary FILRT shares being issued to satisfy FLI’s side of the tender offer.
> Is this a good deal? That depends on the market prices of the underlying stocks, which changed dramatically after this deal was announced. Using the exchange ratio and the pre-announcement share prices, the deal allows shareholders to trade P0.68 worth of FLI for P0.98 worth of FILRT (44% “gain”). If you trust both of the market prices to be the “real” price of those stocks, then objectively you’d likely conclude that to be a pretty good deal. The interesting wrench that gets thrown into this analysis is that–while the exchange ratio is fixed–the market prices of those two stocks are not. The announcement caused FLI’s stock price to pump 22% and FILRT’s stock price to rise 1.6%, such that the deal (if executed based on yesterday’s close) allows shareholders to trade P0.83 worth of FLI for P0.99 of FILRT (19% “gain”).
> OK, but like… why? Well, looking at this as a buyback, it’s already been wildly successful. Not a single share has been tendered, and already the market price of FLI’s shares has skyrocketed. Existing FLI shareholders have the option of converting their shares to FILRT shares at a premium, or to simply selling into all this liquidity that has bubbled up as “normies” peek into the Filinvest ecosystem for a chance to possibly scalp some value. Looking at this as a block sale, it’s a way for FLI to effectively “set” the price of FILRT shares without having to actually test the open market. Who knows if FLI would have been able to get FILRT’s current market value for a 600 million block of shares? Even one of the best REITs on the exchange, AREIT [AREIT 37.50, up 1.4%; 21% avgVol], has had block sales for its shares conducted at a discount.
> What about that 3-day pre-news pump? Yeah, what about it? So what if FLI saw three of its biggest trading days of the year starting just four days before the announcement? So what if there was literally no public reason for that to happen and the volume was predominantly local? That just sometimes happens. All joking aside, it’s clear to me that there were some insiders making trades based on non-public information, but this isn’t a new phenomenon and it’s not something that the SEC has focused on punishing or preventing. It’s more likely to happen when two or more unrelated parties are involved, but info leaks and sus pumps are just a part of this landscape.
> What are the risks? The biggest risk is that the tender offer fails to complete. FLI is not obligated to take any of the shares. There’s likely a strong cultural incentive for FLI to complete this deal on the terms, but there’s no contractual or legal obligation (that I know of) that would compel FLI to do that. Next is the uncertainty caused by the cap; FLI might not be in a position to satisfy all the tendering shareholders if the total number of shares tendered exceeds the 1.866 billion cap. Another risk is price. As the FLI and FILRT prices converge, the “premium” shrinks, and the risk of loss increases. Sure, the value differential predicts a 19% gain at yesterday’s close, but what if FLI goes up again today? Another risk that needs to be appreciated is the future performance of FILRT. Its stock price is up 20% in FY24, but it’s down 55% since its IPO in 2021, and its dividend has been falling steadily since Q1/22. How will the respective stock prices react to the date when all of the tendering shareholders receive their FILRT shares? Will there be a glut of selling in FILRT to push down the price (and the potential reward)?
MB BOTTOM-LINE: I’m actually a big fan of the creativity that Filinvest Group is showing with this transaction. Don’t get it twisted, I’m not suggesting that this is a good deal and that if you own FLI shares you should absolutely tender. I especially don’t mean to suggest that if you don’t own FLI shares you should buy some to tender. But from a financial engineering perspective, this has already proven to be a great way to “unlock” value for FLI shareholders and boost its REIT float. You know what they say, “Your best customers are your existing customers”, and, “It’s cheaper to retain a customer than to acquire a new one.” With that in mind, what FLI is doing here is pretty smart: instead of trying to scrabble together a ragtag batch of institutional investors to soak up a block sale at a discount, they’re giving the people most likely to appreciate the stories and valuations being told the chance to soak up that volume. The catch (for me) is the questionable value of FILRT over the long term. As mentioned, the stock price has been a poor performer (the worst REIT relative to its IPO) and it’s one of the few REITs with a dividend that is shrinking, not growing. My opinions on FILRT are well documented by this point, but if you feel like you want to get some of those FILRTbux, I feel like I’ve done all I can to contextualize what’s going on and how it might play out in the long term.
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