Noster Capital letter to Teekay Offshore shareholders for the month of May 2019.
Q1 hedge fund letters, conference, scoops etc
Dear fellow Teekay Offshore (“TOO”) unitholders and potential unitholders,
As you may know, in the beginning of this week, Brookfield Business Partners (“BBU”) made an unsolicited and predatory offer for the minorities of TOO. At close to an all-time low share price.
BBU owns 73.3% of the units (77% if one accounts for the warrants) of TOO. If they get to 80%, they have the right to buy the remaining 20% in the following way:
“Call Right: If at any time our general partner and its affiliates hold more than 80% of the then-issued and outstanding limited partner interests of any class or series, except for the Series A Preferred Units, Series B Preferred Units and Series E Preferred Units, our general partner will have the right, which it may assign in whole or in part to any of its affiliates or to us, to acquire all, but not less than all, of the remaining limited partner interests of the class or series held by unaffiliated persons as of a record date to be selected by our general partner, on at least 10 but not more than 60 days’ notice. The purchase price in this event is the greater of (x) the average of the daily closing prices of the limited partner interests of such class or series over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (y) the highest price paid by our general partner or any of its affiliates for limited partner interests of such class or series during the 90-day period preceding the date such notice is first mailed.
As a result of our general partner’s right to purchase outstanding limited partner interests, a holder of limited partner interests (except for the Series A Preferred Units, Series B Preferred Units and Series E Preferred Units) may have the holder’s limited partner interests purchased at an undesirable time or price.”
This Call Right can be found on this document, page S-78: https://www.sec.gov/Archives/edgar/data/1382298/000119312518012093/d493270d424b5.htm
The only way we can defeat this Goliath is for all the minorities to be well informed about this process. What the above text means is that from the moment that BBU gets to 80% (if they eventually get there) they have the option to give us notice – the earliest they can do this appears to be after 10 days of crossing that threshold – to set the price at which they will force the minorities out, and that will follow a formula as explained above:
The offer price will be the higher of:
(i) the average of the last 20 closing prices of the 20 last trading days up to 3 days before they give us notice of the squeeze out, or
(ii) the highest price per share paid by BBU or any of their affiliates in the 90 days that precedes them giving us notice.
It is our opinion that they could be buying units in the open market and that once they get to 80%, they can force the squeeze.
If all minorities understand this well, they will possibly conclude that the best course of action is not selling any shares in the market from this moment on. The less shares transact, the least likely it is for BBU to get to 80% by buying in the open market, and the more they will have to push the price up to achieve that threshold.
Our recommendation is: do not sell any shares of TOO if you happen to be a unitholder. The shares are trading at slightly over one dollar. As per the public letter of JDP Capital linked to below, they are estimated to be worth well in excess of 4 dollars. Our own valuation supports an even higher value per share.
Remember this is a company with contracted cash flows in critical energy infrastructure. They are not operating in the speculative spot market. They have over $5 billion of contracted cash flow.
Please read the below letter: https://aqfd.docsend.com/view/8b85g7s
If we succeed, we will delay the take private intention to a point where the cash flows will start flowing and make apparent the incredible value that exists in Teekay Offshore. With the share price reflecting that. Please refrain from selling any TOO shares in the open market. You may even come to conclude how cheap they are and consider adding to your investment in TOO.
Feel free to contact me should you have any question.
Sincerely yours,
Pedro de Noronha
Managing Partner
Noster Capital LLP
