The Atlas Corp. Special Situation (NYSE:ATCO)

I received a number of reader comments/questions on the Atlas Corp. (ATCO) special situation, with most of them relating it to the MLP buyouts (Sprague Resources LP (SRLP), Blueknight Energy Partners (BKEP), Sisecam Resources LP (SIRE)) that I have commented on or written about.

You can find my writeup on Sisecam Resources LP here. My two letters to Blueknight Energy LP’s conflicts committee can be found here and here, and my Sprague Resources LP comment can be found here.

Atlas Corp:

Atlas Corp. (NYSE: ATCO) is a leading global asset management company, differentiated by its position as a best-in-class owner and operator with a focus on deploying capital to create sustainable shareholder value. Atlas brings together an experienced asset management team with deep operational and capital allocation experience. We target long-term, risk adjusted returns across high quality infrastructure assets in the maritime sector, energy sector and other infrastructure verticals. Our two main portfolio companies, Seaspan Corporation and APR Energy Limited are unique, industry-leading operating platforms in the global maritime and energy spaces, respectively.

Source: Atlas Corp

Situation:

A majority shareholder group has made a non-binding offer to acquire the remaining outstanding shares of Atlas Corp for $14.45/share. The full statement can be found here.

Yesterday, Atlas Corp shareholder Charles Frischer made a compelling case that the initial offer severely undervalues the company via a letter to the special committee evaluating the transaction which was made public yesterday.

Given the above, it seems probable that at a minimum we will see some type of bump to the initial proposal.

My take

Playing this for a moderate bump looks like a reasonable trade – particularly when the share price is under the initial proposal level of $14.45.

There are two big advantages over the recent MLP buyout proposals:

1. Any deal will require the majority of minority shareholders to vote in its favor – this is a substantial shareholder protection.

2. The timeline is expedited. The proposal states that that the consortium has a, “goal of entering into a binding definitive agreement within two to three weeks” of the conflict committee’s engagement.

This rapid timeline creates the potential for a very high IRR (Internal Rate of Return).

However, I see increased risk of a “no deal” situation relative to the recent MLP take-privates. With the Atlas Corp proposal, the buyer group is 100% financially minded, highly sophisticated and acting opportunistically, whereas the MLP take-privates were/are strategic acquirers eliminating a nuisance security.

I have zero doubt that this buyer group will cancel the proposal if they are unable to secure a bargain valuation.

In my view, the best opportunity right now is for those who see the potential for a high IRR trade, yet would otherwise be interested in owning ATCO shares as a long-term investment.

The take-private offer is a strong signal that ATCO’s public shares are undervalued.

Buying in at a level less than what highly sophisticated, informed investors (Such as David Sokol, who built Berkshire Hathaway’s Energy business) are willing to pay seems like a sensible starting point. I only started reviewing the company yesterday and have not yet drawn an independent conclusion.

As a pure trade, the potential math is compelling given the compressed time horizon.

Let’s say:

1. There is a 70% chance to make $2.35 (from the current price of $14.05)

2. A 30% chance of losing $2.35 (loss on no deal from current price)

3. The formal offer is made in two weeks

The expected value here would be $.94, or a 6.7% expected gain. I am not going to compute the annualized return on this, but it is astronomical – clearly worthwhile for any trader who thinks the odds and timeline are roughly in line with my hypothetical example.