PHOENIX COMPANIES INC PNX
October 01, 2015 - 11:06am EST by
Shooter McGavin
2015 2016
Price: 32.50 EPS 0 0
Shares Out. (in M): 6 P/E 0 0
Market Cap (in $M): 190 P/FCF 0 0
Net Debt (in $M): 379 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Financial
  • Life Insurance
  • M&A (Mergers & Acquisitions)

Description

This will be an extremely brief write-up given the simplicity of the opportunity I see, and that it may be quickly fleeting.  All analysis below assumes a $32.50 stock price (which was touched this morning) and ignores time value of money in my deal closing probabilities.

Given the size and liquidity of the stock, this may only be suitable for PAs and smaller funds.

On Tuesday, Phoenix Companies announced it was being purchased for $37.50 in cash with an early 2016 expected closing.  This represents a 188% premium to the 9/28 close of $13.03.

I recommend buying shares at $32.50 for a 15.4% return and 33% IRR (assuming “early 2016” means 3/31/16).  If one assumed a 1/31/16 close the IRR jumps to above 50%.  Note: the termination date of the merger agreement is 6/28/16.

Essentially the current price assumes an 80% probability of the deal closing, IF you assume the unaffected price is the price the stock will fall to upon a deal breaking.  Given the significant premium involved, it’s my guess that the stock will not fall by 60%, but by something less than this.  If you assume the share price falls to $20 if the deal breaks (-38%), the probability of the deal closing is priced at 71%

The unaffected price of $13.03 compares $34 BVPS at 6/30/15 and $80 in BV (ex AOCI) per share.  I’m not kidding myself: there are certainly tangible reasons as to why shares were trading at just 38% of book prior to the takeout news, and I’m certainly not advocating that PNX deserves to trade at book.  This is a company that’s had a long history of destroying value.   Management is horrible.  I once called the company at 7pm on the (supposed) deadline they had to file a still-nowhere-to-be-found 10-K/A.  The company’s response was “we’ve still got 5 hours”.   See beep899’s write-up from 2013 for background information.  Since that write-up, the company has gotten beyond its restatement.  But over three quarters (from Q314 to Q215) burned through an extreme (~2/3) amount of equity with management citing interest rates and significant adverse mortality.

The buyer in the deal is Nassau Resinsurance Group Holdings, LP which was formed this year with backing from Golden Gate Capital.  As part of the deal, Nassau has agreed to contribute another $100mm into the company after the close to stabilize Phoenix.  I believe given the spotty track record of the company, and the $100mm contribution, the deal will past muster with NY and CT insurance regulators.  Note that Phoenix and Nassau had already engaged in discussions with the state insurance regulators regarding the proposed transaction in advance of executing the merger agreement.  I can’t imagine Nassau would have proceeded if there were significant question marks.

As part of the transaction, Phoenix will solicit its bondholders to amend the indenture to replace its public filing requirements with “obligations more appropriate for a privately held company”.

From my read of the merger agreement, Nassau can’t walk away unless there’s an R&W breach on the part of Phoenix (quite possible given this management team!), the deal doesn’t get regulatory clearance (I think this in minimized given prior conversations with state agencies and the capital contribution), or this doesn’t get PNX shareholder approval (I can’t imagine a 188% premium will get voted down).

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Takeout at $37.50/share.

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    Description

    This will be an extremely brief write-up given the simplicity of the opportunity I see, and that it may be quickly fleeting.  All analysis below assumes a $32.50 stock price (which was touched this morning) and ignores time value of money in my deal closing probabilities.

    Given the size and liquidity of the stock, this may only be suitable for PAs and smaller funds.

    On Tuesday, Phoenix Companies announced it was being purchased for $37.50 in cash with an early 2016 expected closing.  This represents a 188% premium to the 9/28 close of $13.03.

    I recommend buying shares at $32.50 for a 15.4% return and 33% IRR (assuming “early 2016” means 3/31/16).  If one assumed a 1/31/16 close the IRR jumps to above 50%.  Note: the termination date of the merger agreement is 6/28/16.

    Essentially the current price assumes an 80% probability of the deal closing, IF you assume the unaffected price is the price the stock will fall to upon a deal breaking.  Given the significant premium involved, it’s my guess that the stock will not fall by 60%, but by something less than this.  If you assume the share price falls to $20 if the deal breaks (-38%), the probability of the deal closing is priced at 71%

    The unaffected price of $13.03 compares $34 BVPS at 6/30/15 and $80 in BV (ex AOCI) per share.  I’m not kidding myself: there are certainly tangible reasons as to why shares were trading at just 38% of book prior to the takeout news, and I’m certainly not advocating that PNX deserves to trade at book.  This is a company that’s had a long history of destroying value.   Management is horrible.  I once called the company at 7pm on the (supposed) deadline they had to file a still-nowhere-to-be-found 10-K/A.  The company’s response was “we’ve still got 5 hours”.   See beep899’s write-up from 2013 for background information.  Since that write-up, the company has gotten beyond its restatement.  But over three quarters (from Q314 to Q215) burned through an extreme (~2/3) amount of equity with management citing interest rates and significant adverse mortality.

    The buyer in the deal is Nassau Resinsurance Group Holdings, LP which was formed this year with backing from Golden Gate Capital.  As part of the deal, Nassau has agreed to contribute another $100mm into the company after the close to stabilize Phoenix.  I believe given the spotty track record of the company, and the $100mm contribution, the deal will past muster with NY and CT insurance regulators.  Note that Phoenix and Nassau had already engaged in discussions with the state insurance regulators regarding the proposed transaction in advance of executing the merger agreement.  I can’t imagine Nassau would have proceeded if there were significant question marks.

    As part of the transaction, Phoenix will solicit its bondholders to amend the indenture to replace its public filing requirements with “obligations more appropriate for a privately held company”.

    From my read of the merger agreement, Nassau can’t walk away unless there’s an R&W breach on the part of Phoenix (quite possible given this management team!), the deal doesn’t get regulatory clearance (I think this in minimized given prior conversations with state agencies and the capital contribution), or this doesn’t get PNX shareholder approval (I can’t imagine a 188% premium will get voted down).

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    Takeout at $37.50/share.

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