Description

Here’s a decent oddlot exchange offer from Cummins this week.  Pre-tax gain of ~ $2,150 per account, which is on the high end of these split-off exchanges.

Here’s the trade:

1. Buy 99 shares of CMI at $265.80

2. CMI goes ex-div on 2/22 with $1.68/CMI dividend

3. Tender all shares by the end of the day on March 13^th, 2024 (check with your broker on their expiration, IB typically does 1pm on the day of)

4. Receive ~1,255 shares of ATMU (equivalent to receiving CMI proceeds of $285.81/share)

5.  Sell ATMU shares to complete the odd-lot trade

Exchange ratio:

The exchange offers a premium of 7.053% in ATMU shares for each CMI share exchanged, subject to the upper limit. The upper limit is 13.3965 ATMU shares/CMI share and currently stands at 12.686.

There isn't a lower limit on the exchange.

This one is the standard, three days before VWAP to determine the exact exchange ratio.  It will be calculated as the simple arithmetic average of VWAP of CMI and ATMU on March 7^th , 8^th, and 11^th.  The final exchange ratio will be announced by 5:30pm on March 11^th. 

P&L:

If the exchange were to occur today, the P&L would be as follows:

• Cost Basis (A): 99 shares of CMI at $265.80/share = $26,314.20
• CMI Dividend of $1.68/share on 3/7/24 (ex div 2/22) (B) = $166.32
• Receive 1255.9103 ATMU shares on 3/13/24 (C) = $28,295.66
• P&L: C+B-A= $28,295.66+$166.32-$26,314.20= $2,147.78 profit

One extra small positive here is the $1.68 CMI dividend that goes ex-div on February 22^nd.

Range of outcomes:

These exchange offers work almost all the time but not ever time.  Specialsituationsinvestments.com has a good study of these here and the base rate is to put these on unhedged.  However, you do occasionally get burned, with the 3M exchange being a great example.  The litigation during the exchange period seemed liked bad look but point is it can happen.

The JNJ/KVUE split-off last year was similar to this one in that borrow was quite tight leading into the spinoff and ultimately worked well unhedged.  If I could put this on hedged, I would, but IB is showing almost no availability.  As a result, I’m betting the base rate and have this on unhedged.

Here’s how I’m looking at different scenarios during the exchange:

Details:

https://www.okapivote.com/CumminsAtmusExchange/

Risks:

• The biggest one is that the odd-lot priority is cancelled and odd-lots face proration like the rest of the shareholder base. There’s been increasing concern about this in recent years.
• A distant second risk is the delay of the exchange.  This is similar to other “standard” exchange offers so I think you’re well compensated for these risks.
• Last is an overall market decline or something specific to Cummins during the period.  I think you’re well compensated with a 7.53% premium for less then 30 days but you can always hedge the market exposure.

Catalyst

March 13^th exchange