16. Cummins split off of Atmus Filtration Technologies
Split off arbitrage. Short but sweet post.
Thanks for identifying this arbitrage opportunity and bringing it to my attention go to a person that goes under the handle diegogomezle on Twitter. I got to exchange opinions with Diego on several occasions so far, most notable being Idaho First Bank acquisition by Bawag, and to some extent on Sygnity in its early days. Diego has admirable investment results over the period of last 12 years.
This is an actionable idea, that can vary in the level of profitability and riskiness, depending on your own personal risk preferences. Below, I list actions I took, but not as an investment advice, but only as a personal log. Those few that are voluntary paid subscribers, if they chose to act similarly and this arbitrage plays out as it should, would get their moneys worth from their subscriptions so far.
Words of caution. I have not previously engaged in similar transactions. I have not studied the business of Cummins and Atmus in great detail. What you will find below is just a mathematical construct around announced split off, that I was analysing over the last weekend.
Split-off deal details
All details related to the transaction can be obtained through https://www.okapivote.com/CumminsAtmusExchange/, where also we should be notified of the final exchange ratio for the transaction. A link to prospectus can also be found on this page.
Under the announced split off each share of Cummins will be tendered off for the number of shares of Atmus determined as average price (VWAP) of Cummins over the 7th, 8th and 11th of March 2024, divided with average price (VWAP) of Atmus multiplied with 0.93.
Based on the so far trading in past few days, and as of today (11th March), exchange ratio should be close to 12 (Average of March 07: 12.08320; March 8 12.1263, March 11: 11.8995.
Since the prospectus prevent proration on the odd lots, this implies potential arbitrage profit of more than USD 2,000, by purchasing 99 shares of Cummins for USD 26,450, and short selling 99*12= 1,188 shares of Atmus for USD 29,200.
Tender can be cancelled if less than 50% of planned split off of 67,054,726 Atmus is subscribed. This translates to roughly 1.7% of the current Cummins float that would have to be submitted to the tender offer. This I deem unlikely. The prospectus also leaves an option of distributing Atmus shares as a for of dividend to Cummins shareholders in case that the tender fails.
Details of the tender also leave an option of recalling the shares submitted for the tender after the publication of the final exchange ratio on the March 13, 2024. Following this date, I would expect that I will receive Atmus shares within a week. This expectation is based on the analysis provided by Special Situations Investing.
Risk
Tender can be cancelled due to a variety of reasons, most important being low subscription. Sudden appreciation of Cummins, or depreciation of Atmus can also cause the situation where one would receive less than USD 100 of Atmus shares for USD 100 of Cummins shares. Although, so far, it seems that this will not be the case (these could be the famous last words).
Why the opportunity exist
With this transaction, Cummins is effectively selling Atmus to the public while avoiding tax liabilities. They are motivated by 20+% tax benefit. Odd lot proration exclusion is just a nice chance for a small retail investor.
Disclaimer and kind request
Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.
If anything you pick up from my substack or Twitter account results in you earning a reasonable profit, keep the karma going. Subscribe, even for a month.
In any case, it does not hurt to subscribe, share this article or comment. It hurts me if you don’t 😇
Or just share your best idea you can quantify with me.
Best of luck to all of us! 🍀
According to the exchange agent, Broadridge Corporate Issuer Solutions, LLC, 69,142,112 shares of Cummins common stock were validly tendered and not properly withdrawn, including 36,902,099 shares that were tendered by notice of guaranteed delivery and 1,006,609 shares that tendered in aggregate by “odd-lot” shareholders (holders of fewer than 100 shares) not subject to proration. Cummins intends to accept 5,574,050 of the tendered shares in exchange for the 67,054,726 shares of Atmus common stock owned by Cummins. Because the exchange offer was oversubscribed, Cummins is accepting only a portion of the shares of its common stock that were validly tendered and not validly withdrawn, on a pro rata basis in proportion to the number of shares tendered. Shareholders who owned fewer than 100 shares of Cummins common stock, or an “odd-lot,” who have validly tendered all of their shares, will not be subject to proration, in accordance with the terms of the exchange offer.
https://investor.cummins.com/news/detail/643/cummins-announces-preliminary-results-of-atmus-filtration
Option to subscribe to tender is still open in Interactive Brokers. Based on my understanding it closes on the 13th March.