Description

ELEVATOR PITCH

Odd lot tender.  Trading below the lower bound: $TLNE is trading for $110, whereas the range is $116-$122.  Potential gain of $594 on an investment principal of $11K (5% return in a week).  Buy 99 shares and tender prior to the 6/12/2024 deadline.

OVERVIEW

This isn’t a writeup on the merits of investing in the Company—if you wish to read that, see the VIC May 2023 writeup/comments.  Instead, this is a writeup on a weeklong trade for your personal account.

Talen Energy (OTCQX: TLNE) announced on 5/29/2024 that it is buying back $600M (~9%) of its stock via a tender offer.

The range is $116 to $122 per share, provided you tender by the “Early Tender Time” date of 6/12/2024.  If you tender after then (i.e., by the second stage’s deadline of 6/27/2024), you receive $3 per share less.  However, there won’t be a second stage if the offer is fully subscribed as of the 6/12/2024 deadline.

The stock currently trades below the tender offer range of $116-$122: $TLNE trades for $110 at the moment. 

This presents an opportunity for a $6 per share gain (=$116 minus $110).  This is equivalent to a 5% gain (=$6 / $110) with an annualized IRR of >100% given this trade ties up your cash for merely a week.

RISK #1

This tender offer has a 10% decrease condition.  This means that if either of the following 3 things occur from the announcement date 5/28/2024 to the tender date 6/12/2024, the Company may elect to postpone or terminate the tender offer:

i. A 10% decline in either the DJIA, S&P500, NASDAQ Composite, or NYSE index.  Note that these indexes haven’t declined since the announcement.

ii. A 10% decline in the stock (i.e., $TLNE trading for less than $102.24 per share).  Note that $TLNE has traded between $106.11-$118.99 since the announcement.

iii. A 10% decline in the “Energy Share Basket” which is comprised of these 3 companies: Vistra ($VST), Constellation ($CEG), and NRG Energy ($NRG).  By my calculation, the basket has declined 11% at the moment.  I think the Company will waive this provision for several reasons:  The Company is looking to uplist (from the OTCQX where $TLNE is currently listed) and, prior to then, wants to buy back a significant portion of its stock in a short period of time (i.e., ~9% of its stock via this tender plus ~6% additional was authorized last month).  The buyback was triggered, in part, because the Company’s data center was recently sold to Amazon for $650M.  Per the announcement press release: "This tender offer reflects...the value created by recent strategic transactions related to the Company's sale of its ERCOT generation portfolio and the Cumulus data center campus".  This $600M “Tender Offer is part of the Company's recently upsized $1 billion share repurchase program that was approved by its Board of Directors earlier this month”.  Additionally, I am not aware of any tenders having been canceled because of this sort of condition being breached, with the exception of during COVID in 2020 in which companies were looking to preserve cash instead of continuing with their previously announced tender offers.

RISK #2

This tender offer’s odd lot provision could be canceled.  This tender has “odd lot priority” which means that those owning 99 shares or less will be bought back firstly.  Per the offer agreement: “Odd lots will be accepted for payment before any proration”.  Companies can remove the odd lot provision and historically have done so when there are too many people doing the tender via an odd lot.  I think the Company is unlikely to do this because this offer is large (i.e., $600M or ~9% of its stock), which means a low likelihood that odd lot holders will comprise a significant percentage of the total tendered.  Additionally, the Company is trying to buy back an even larger amount of stock in total and over a short period of time.

DEADLINE

The deadline to tender your shares depends on your broker.

The Company’s deadline is this upcoming Wednesday (6/12/2024).  Per the press release: “In order for stockholders to be eligible to receive the Total Consideration, such holders must validly tender their Shares at or prior to 5:00 PM, New York City time, on June 12, 2024”

However, your deadline to tender is likely sooner depending on your broker.  For instance:

• Schwab has one of the earliest deadlines that you must tender by: Monday (6/10/2024) 7pm ET.
• Interactive Brokers has one of the latest deadlines that you must tender by: Wednesday (6/12/2024) 1pm ET.

Catalyst

Expiration of the first stage of this tender offer on June 12^th, 2024.