Description

Another beer money odd-lot situation for your PA

• Buy 99 shares of CMI
• Tender all shares before the close on March 13, 2024
• Short approx. 1254 shares of ATMU
• Net proceeds approx. $1950

Cummins (CMI) spun off Atmus Filtration Technologies, Inc. (ATMU) last year but retained most of the shares. CMI shareholders can now elect to receive shares of ATMU at a discount in an exchange offer.

For each $100 of CMI Common Stock accepted in the Exchange Offer, you will receive approximately $107.53 of shares of ATMU Common Stock, based on the Average Cummins Price and the Average Atmus Price, subject to an upper limit of 13.3965 shares of Atmus Common Stock per share of Cummins Common Stock. 

Average prices calculated as follows:

The “Average Cummins Price” and the “Average Atmus Price” will be determined by reference to the simple arithmetic average of the daily volume-weighted average prices (“VWAPs”) for Cummins Common Stock and Atmus Common Stock, respectively, on the New York Stock Exchange (the “NYSE”) during the three consecutive trading days ending on and including the second trading day immediately preceding the expiration date of the Exchange Offer (which, if the Exchange Offer is not extended or terminated, would be March 7, 8 and 11, 2024).

There is an odd-lot provision:

Except as otherwise provided in this section, beneficial holders of “odd-lots” (less than 100 shares) of Cummins Common Stock who validly tender all of their shares will not be subject to proration if the Exchange Offer is oversubscribed. Direct or beneficial holders of more than 100 shares of Cummins Common Stock, and those who own less than 100 shares but do not tender all of their shares, will be subject to proration.

Hedging:

There is pretty much no borrow available right now on ATMU at IBKR, (though that may change) and what there is is quoted as about 28% borrow rate if you want to lock in the spread. Given this, you may also prefer to wait until close to the final date to get certainty on the ratio and be sure that the upper limit isn’t exceeded.

Going unhedged:

I don’t have a strong view on ATMU but it doesn’t look expensive, so you may prefer not to hedge anyway. They just announced Q4 and gave guidance for 2024. Growth guidance is low (about 2%), but margins are healthy and EPS guidance is $2.10-$2.35, so it's trading just under 10x at the midpoint.

Summary filing: https://www.sec.gov/Archives/edgar/data/1921963/000110465924022978/atmu-20231231xex99d5.htm

S-4 from ATMU: https://d18rn0p25nwr6d.cloudfront.net/CIK-0001921963/11a2b253-e331-420c-9371-34505b853508.pdf

Risks:

• CMI can pull the exchange deal or the odd lot preference
• ATMU price falls significantly relative to ATMU, upper limit of 13.396 exceeded
• Of course, I may have messed up on details, so DYODD

Catalyst

Close of the deal, exchange of shares