July 19, 2010 - 10:55am EST by
2010 2011
Price: 48.80 EPS $0.00 $0.00
Shares Out. (in M): 31 P/E 0.0x 0.0x
Market Cap (in $M): 1,600 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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This is a TODAY ONLY trade.


Buying Credit Acceptance Corporation (CACC) stock at its current trading level ($48.80) is a way to make a quick ~$120.  The profit on this trade is capped so it won't make you rich, but hey, $120 is $120 and this is kind of fun trade to consider.  And yes, this one's just for the "personal account".


The key to this trade is that the Company is tendering for stock at $50.00 per share and that the tender offer has "odd lot" provisions such that tender acceptances of less than 100 shares are not subject to proration.  So, if you buy 99 shares right now at CACC's price of $48.80, you can then tender the shares at $50.00 (without being subject to proration), and capture the $118.80 difference less trading commissions.


Please note that this write-up is for a quick trade which focuses on the event and therefore does not contain any fundamental analysis on the Company itself.


Company Description

CACC is a provider of auto loans to consumers, regardless of their credit history.  The Company offers its financing product through a nationwide network of automotive dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing.


The Event

On June 18, 2010 CACC announced that it was commencing a tender offer to purchase up to 4.0 million shares of its common stock (~13% of the Company's 31 million shares outstanding as of May 31, 2010).  The key aspects of the tender offer are:

  • Consideration: $50.00 per share in cash
  • Timing: Unless extended by CACC, the tender offer will expire at 5:00pm EST, Monday, July 19, 2010.  Tenders of shares must be made on or prior to the expiration of the tender offer and shares may be withdrawn at any time on or prior to the expiration of the tender offer.  CACC will pay the purchase price for the share purchased within 3 business days after the expiration of the tender offer.  In the event of proration, CACC does not expect to be able to commence payment for shares until approximately 5 business days after the expiration date.
  • Financing:  CACC anticipates that it will obtain all of the funds necessary to purchase shares tendered in the offer, and to pay related fees and expenses, by borrowing under its $325 million revolving second warehouse facility and its $150 million secured revolving line of credit.
  • Rationale:  According to the Company's press release, the primary purpose of the transaction is to distribute excess capital to shareholders at this time for the following reasons:
    • Since the last distribution to shareholders in 2006, CACC has generated over $300 million in net income
    • CACC has recently completed several longer term debt financings which have significantly reduced the probability that the Company would need to curtail originations if the debt markets become inaccessible
    • Upon completion of the tender offer, CACC will have sufficient capital to fund new originations with approximately $190 million in unused and available capacity on its revolving lines of credit

The Company also stated that since 1999, CACC have distributed $399.2 million to shareholders through share repurchases and that while the Company could distribute excess capital to shareholders through dividends, share repurchases provide shareholders with discretion to increase their ownership, receive cash, or do both based on their individual circumstances; a dividend does not provide this flexibility.


All that being said, what's really going on here is that the founder and majority owner (63%), Daniel Foss, is cashing out of some of his stock (he's tendering 15.4 million shares, but obviously will be subject to proration).


"Odd Lot" Provisions

The key to this entire trade is the "odd lot" provisions contained in the tender offer.  Key points are as follows:

  • "Odd Lot" holders (owners of less than 100 shares) are given priority in the tender offer and are therefore not subject to proration.
  • In the summary term sheet (page 6 specifically) of the tender offer document (Schedule TO filed with the SEC on June 18, 2010), it is stated that if more than 4 million shares are tendered in the tender offer, CACC will purchase shares:
    • First, from all holders of "odd lots" of less than 100 shares
    • Second, from all other shareholders on a pro rata basis
    • Third, from other holders under certain conditions
  • This is stated again on Page 11 of the document where it is written "in the event of an over-subscription of the tender offer, shares tendered will be subject to proration, except for odd lots".
  • Of note, to qualify as an "odd lot holder", the person must own fewer than 100 shares in aggregate and must tender all shares owned.  Accordingly, individuals owning 1,000 share (as an example), can't just tender 99 and qualify as an "odd lot" holder.


The Trade and its Return Profile

To take advantage of these "odd lot" provisions one can trade the stock as follows:

  • Buy 99 shares of CACC at $48.80 (current price as of 10:30am) for a total price of $4,831.20.
  • Tender all 99 shares at $50.00 (not subject to proration)
  • Receive $4,950.00 in cash on July 26, 2010 - 5 business days after the tender expiration (being conservative and assuming the tender will be subject to proration)
  • Generate a 2.5% return on a 5-day investment


The Catch

Yes, there's always a catch.  Never any free money out there.


The tender has a variety of conditions to it (they are all listed on pages 2 and 3 of Schedule TO) under which the Company can withdraw the tender offer.  Most of them are "MAC" clauses, such as legal action against the Company, acts of war/terrorism, etc. 


However, there is a clause that states that the tender is subject to: "No decline of 10% or more in the market price of CACC common stock or in the Dow Jones Industrial Average, New York Stock Exchange Index, Nasdaq Composite Index or the S&P 500 Composite Index measured from the close of trading on June 17, 2010 shall have occurred".


As of the close on July 16, 2010 the returns on these is as follows:

  • CACC stock - +4.0%
  • Dow Jones Industrial Average - (3.2%)
  • NYSE Exchange Index - (4.0%)
  • Nasdaq Composite - (5.6%)
  • S&P 500 Index - (4.6%)


So, unless we have another "flash crash" today where the broader indicies decline >5.0% in one day, the tender offer should be completed.


Again, this isn't a big money maker, but $120 is $120 and overall this trade looks incredibly low risk.


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