Nielsen Stock: A $4 Spread And A Switch (NYSE:NLSN)

Nielsen (NYSE:NLSN) at the current price represents an opportunity where the odds are in our side. The annualized spread is over 50% if the deal closes by October 2022, and the odds of the deal to go through are much bigger than the market is pricing because is too worried about WindAcre statement that will block the deal. They can block the deal, but there are workarounds that the buyer consortium can use to force the purchase.

Background

Nielsen started a strategic review in the last quarter of 2018. A year later, in November 2019, with the strategic review complete and having received no offers for the whole business the company announced a spin-off of its Global Connect business. With Elliot help it end up selling the business to Advent International for $2.7 Billion in March 2021. In July 2022, Elliot started to express that would like to take Nielsen private at significant premium, and after a couple of negotiations the buyer consortium, which includes Elliot and Brookfield offered $30 per share, but then corrected it to $28 per share due to toughening financing conditions (yields have been rising). The 28$ per share represented a premium of 60% above NSLN unaffected price. Shareholders would have their day spoiled by WindAcre Partnership, which said that Nielsen was worth a lot more and that would seek to block the deal.

The Players

Normally acquisitions have two sides, the buyers, and the seller. In this case we have a third party, a greedy hedge fund, which is at the same time the party pooper and the opportunity creator. The buyers are a consortium of Elliot Associates and Brookfield Asset Management (BAM), two big firms with big PE arms with Elliot being known for its activist positions. Nielsen is the target, but also THE television and internet ratings company. Nielsen revenues and EBITDA have been stable for the last couple of years at $3.5 billion and $1.1 billion, respectively. The stability in revenues and EBITDA makes Nielsen a good candidate for PE, although it seems a bit leveraged with long term debt of $5 billion. The third player is a $7 billion hedge fund, WindAcre Partnership, that opposes to the Nielsen acquisition because it says that the company is worth at least $40 per share.

The Deal

The deal is a financial one since the buyers is PE consortium. Nevertheless, financing is not a condition to the merger and the buyers have the money lined up with equity and debt commitment letters. The consortium valued the company at $16 billion which makes the take private at a multiple of EV/EBITDA of around 14.5x. It seems a fair price if we account for Nielsen financials results in the last few years. Regarding the termination fees things appear tight for the consortium that would have to pay $511 million to walked away from the deal while Nielsen would have to pay $102 million to accept another offer. The regulatory approvals in the US, EU have been given and the only ones missing is the UK and Australia which should not be a problem. The only big hurdle is the shareholder vote!!

The Drama

First of all, gross spreads of 16% and annualized returns of +50% are not normal and for that opportunity to present itself it must have some issues. In this case the issue is the stance of WindAcre Partnership which pretends to block the deal. Since the deal announcement WindAcre position on Nielsen has increased quickly from 9.6% to 27% in order to be able to block the deal, since the merger is an UK Scheme and needs an approval from 75% of the shareholders to pass. What does not make sense is why WindAcre is blocking the deal that all the other shareholders want to accept?

In January 2022, when Elliot and Nielsen were negotiating an agreement WindAcre sent a letter to Nielsen asking it to maximize the intrinsic value for Nielsen shareholders and for them that was at least $40. Elliot at the time invited WindAcre to join the consortium but after a few talks the hedge fund replied:

Following these discussions, WindAcre informed Nielsen and the Consortium that it had determined not to join the Consortium and that it would oppose the transaction as it views Nielsen’s intrinsic value to be significantly higher than values proposed by the Consortium.

The answer does not make much sense, since if they were in the consortium, they would take advantage of the intrinsic value that Nielsen would create in the future. In this case the deal is even better because the hedge fund could get for $28 something that its already worth $40, I would say that is a pretty good deal. One of the possibilities is that the hedge fund does not want to have more than 30% of their assets in an illiquid position. But the real reason for the talks between the consortium and the partnership to break down came to light in the news:

During negotiations, though, WindAcre offered support for the deal if the P-E buyers granted it that $40/share private-company equivalent for each of its 86.5 million shares and options.

So, the hedge fund wanted to be awarded an extra $1.1 billion in the for their position. This looks a lot like greenmail in the 80’s, pay me and I will go away. But, fortunately for shareholders the UK merger law has a twist. The merger is currently designed as a scheme that needs 75% of the votes to get approved, but Nielsen and the PE consortium can switch the scheme to a tender offer, and the merger agreement predicts this, where the consortium only need 50% plus on share to get the company. Who wants to sell their shares in the offer can do it at the same price, $28, who wants to keep the shares can also do it, and apparently besides WindAcre everyone wants to sell. If Nielsen and the buyers choose this path then the end game for WindAcre is a big illiquid position on their fund, which I don’t think they want. Another possibility, worst for shareholders, is the Equity Issuance Proposal that passed in a meeting in May the 17th. The Equity Issuance Proposal would allow the Board to be able to issue equity, dilute nonparticipating owners by as much as 66%, and potentially issue equity on a selective basis to a party favored by the Board. This is a dangerous tool, but I don’t think the Board will use it unless to close the deal.

The market implied probability for the deal to close is around 60% and I believe it’s much higher, so the odds are on our side on this one!