Arbitrage in the Stock of Trina Solar Limited for a 118% Weighted Average Annualized Return

Our goal with arbitrage is to minimize our holding period and to maximize our weighted average annualized return of 20% or more. This is the story of the arbitrage in the stock of Trina Solar Limited. I did a podcast episode on the arbitrage of TSL that shares some more details.

I stumbled across this merger arbitrage opportunity when I discovered another type of SC form that could be searched for in the SEC database. That form is a SC 13E-3, which foreign companies use to report transactions.

Schedule 13E-3 must be filed by any company that becomes private and has securities registered under Section 12 of the Securities Exchange Act of 1934. An individual or group of people may purchase a company's stock in order to take it private because it feels that the market is undervaluing the shares. When a firm goes private, its stock is no longer available for sale through open markets.

In this case, Trina Solar Limited (“TSL”) was a Chinese company, incorporated in the Cayman Islands. The Buyers taking this company private was a consortium comprised of Mr. Jifan Gao (Chairman and CEO of Trina), and Shanghai Xingsheng Equity & Management Co., Ltd, a subsidiary of Industrial Bank Co., Ltd. Industrial Bank is actually Industrial Bank of China, as in a Chinese state-owned bank. In essence, this transaction was a company being bought by China.

The Chairman, Jifan Gao, would end up owning 42% of the new entity by rolling over owned shares.

Key Dates

August 1, 2016 – this is the date the Agreement and Plan of Merger was signed

August 26, 2016 – the date the SC 13E3 was filed

September 19, 2016 – the annual shareholder’s meeting

November 7, 2016 – the date announcing an extraordinary shareholder meeting to vote on the transaction to be held December 16, 2017

December 7, 2016 – announcement of continued progress towards closing.

December 16, 2016 – announcement that shareholders had approved the transaction

December 22, 2016 – The first time I acquired shares in the transaction.

March 13, 2017 – Announcement of the closing of the transaction.

Purchase Price in all Cash

By preferring all-cash payments, I know exactly what I’m going to get in an arbitrage, and I won’t be taking chances trading my cash for stock that may or may not perform the way I want.

The SC 13E-3 form announced that the holder of TSL American Depository Receipts (“ADRs”) would receive cash consideration of $11.60 per ADR when the transaction closed.

“Under the terms of the merger agreement, at the effective time of the merger, each outstanding Share (including Shares represented by ADSs), other than (a) Shares (including Shares represented by ADSs) beneficially owned by the Rollover Securityholders (the "Rollover Securities"), (b) Shares (including Shares represented by ADSs) owned by Parent, Merger Sub or the Company (as treasury shares, if any), or by any direct or indirect wholly-owned subsidiary of Parent, Merger Sub or the Company, in each case immediately prior to the effective time of the merger, (c) Shares (including Shares represented by ADSs) reserved (but not yet allocated) by the Company for settlement upon exercise of Company share awards (each a "Company Share Award") issued by the Company under any Company Share Plan (as defined below), and (d) Shares owned by shareholders who have validly exercised and have not effectively withdrawn or lost their dissenters' rights under the Companies Law, Cap. 22 (Law 3 of 1961 as consolidated and revised) of the Cayman Islands ("Cayman Islands Companies Law") (the "Dissenting Shares") (Shares described under (a) through (d) above are collectively referred to herein as the "Excluded Shares"), will be cancelled in exchange for the right to receive $0.232 in cash without interest, and for the avoidance of doubt, because each ADS represents 50 Shares, each issued and outstanding ADS (other than any ADS representing Excluded Shares) will represent the right to surrender the ADS inexchange for $11.60 in cash per ADS without interest (less $0.05 per ADS cancellation fees and (if applicable) up to $0.02 per ADS depositary services fee pursuant to the terms of the deposit agreement (the "deposit agreement"), dated December 2, 2008, by and among the Company, The Bank of New York Mellon, (the "ADS depositary") and the holders and beneficial owners of ADSs issued thereunder), in each case, net of any applicable withholding taxes.”

Fair Price

A fair price that does not significantly under-value or over-value a company is one piece of the puzzle that should make for a smooth transaction.

The price offered was a 40% premium to the previous price, and was 5.0 to 5.8x 2016 Estimated EBITDA. The sum-of-the-parts analysis provided by Trina showed a combined firm value of between $2.0 and $2.4billion versus the offer price of $2.4B

Not a rich price, but a fair price for a solar company in a troubled industry.

About the Target

Founded in 1997, Trina engaged in the manufacture and sale of integrated solar-powered products and specializes in the manufacture of crystalline silicon photovoltaic modules and system integration. Trina has more than 20 production and sales centers around the world and employs 14,200 people. Headquarters are in Changzhou, China.

About the Buyer

Industrial Bank Co., Ltd (“Industrial Bank”) is one of the first batch of joint-stock commercial banks approved by the State Council and the People's Bank of China. On February 5, 2007, Industrial Bank was listed on Shanghai Stock Exchange (Stock Code: 601166) with total registered capital of RMB10.786 billion. The main business scope of the Bank includes: deposits taking; provision of short, medium and long-term loans; domestic and international settlement; bills acceptance and discounting; issuing financial bonds; agency issuing, cashing and underwriting of government bonds; trading of government bonds and financial bonds; agency issuing quoted securities except equity, trading and agency trading of quoted securities except equity; asset custody business; inter-bank borrowing and lending; trading or agency trading of foreign exchange; settlement and sales of foreign exchange; bank card business; L/C services and guarantee; agency collections and payments, safe-box services, financial consulting, credit investigation, consulting, witness business, and other banking activities approved by the China's Banking Regulatory Commission.

Wonder World Limited an exempted company with limited liability incorporated under the laws of the Cayman Islands. Wonder World Limited is an investment holding company wholly owned by the Chairman. The Chairman is the sole director of Wonder World Limited.

Jiangsu Panji Investment Co., Ltd.

Jiangsu Panji Investment Co., Ltd. ("Panji") is a limited liability company incorporated under the laws of the People's Republic of China. Panji is a company wholly owned by the Chairman. The Chairman is the sole director of Panji. The business address of Panji is Suite 2001, Building 5, Times Business Square, New North District, Changzhou, Jiangsu 213022, People's Republic of China. The telephone number at this address is (+86) 519 8517-6806.

Shanghai Xingsheng Equity Investment & Management Co., Ltd.

Shanghai Xingsheng Equity Investment & Management Co., Ltd. ("Xingsheng") is a limited liability company incorporated under the laws of the People's Republic of China. Xingsheng is primarily engaged in the business of making equity investments. Xingsheng is indirectly wholly owned and controlled by CIB Fund Management Co., Ltd. ("CIB Fund"), a leading investment fund management company in the People's Republic of China. The business address of Xingsheng is Building 7, Fortune Plaza, 198 Puming Road, Pudong, Shanghai, 200120, People's Republic of China. The telephone number at this address is (+86) 21 2221-1888.

Shanghai Xingjing Investment Management Co., Ltd.

Shanghai Xingjing Investment Management Co., Ltd. ("Xingjing") is a limited liability company incorporated under the laws of the People's Republic of China. Xingjing is primarily engaged in the business of making equity investments. Xingsheng is indirectly wholly owned and controlled by Huafu Securities Co., Ltd. ("Huafu Securities"), a securities company in the People's Republic of China. The business address of Xingjing is Floor 29, China Merchant Bank Shanghai Plaza, 1088 Lujiazui Ring Road, Pudong, Shanghai 200122, People's Republic of China. The telephone number at this address is (+86) 21 2065-5537.

Great Zhongou Asset Management (Shanghai) Co., Ltd.

Great Zhongou Asset Management (Shanghai) Co., Ltd. ("Great Zhongou") is a limited liability company incorporated under the laws of the People's Republic of China. Great Zhongou is primarily engaged in the business of making equity investments. Great Zhongou is wholly owned and controlled by Zhongou Fund Management Co., Ltd. ("Zhongou Fund"), a leading investment fund management company in the People's Republic of China. The business address of Great Zhongou is 8th Floor, Bank of

Big Fish Swallowing a Little Fish

I primarily look for situations where a large company is buying a much smaller company, known as a “tuck-in” acquisition. There is much less of a risk that regulators will be concerned about a monopoly with a tuck-in than a merger of equal size companies, or the rare mouse swallowing an elephant type of transaction.

China is a fairly large fish, and the state-supported private equity firms are also flush with an extraordinary amount of cash.

Little Fish Profitable and Valuable

If you buy into a simple merger arbitrage, you are buying the stock of the target. Like any other investment, it is important to understand the value of the underlying company. Why? If the transaction doesn’t close, you may be stuck owning the target company, so you should know what it is worth.

​TSL was valued at $2.0 to $2.4 Billion and the transaction price was at $2.4 Billion. I estimated a potential

Other Bidders Backstop the Value

One way to see that the Target has some underlying value is to check if there were other bidders during the negotiation stage of the transaction. This will be disclosed as a “history of the transaction” in a filing with the SEC.

There were no other bidders in this take-private transaction. Given the influence of the Chairman, it is unlikely that the company would have been “shopped.” Here is what the proxy statement had to say:

“The board of directors of the Company did not independently determine to initiate a process for the sale of the Company. The special committee was formed on December 13, 2015, in response to the receipt of the Proposal Letter on December 12, 2015. The special committee noted that the Buyer Group, who collectively owned approximately 5.5% of the total outstanding Shares as of December 13, 2015, had entered into the Consortium Agreement on July 31, 2016 pursuant to which they were committed to supporting the Buyer Group's proposal only. Taking these considerations into account and the significant disruption to the operations of the Company that a broad pre-signing market check may cause, including the potential risk of competitive harm to the Company if strategic buyers conducted due diligence but a transaction did not occur, and the increased risk of leaks, which could create instability among the Company's employees as well as its customers and vendors, the special committee decided to reach out to a limited number of the most likely potential buyers to assess their interest in an alternative transaction and remain open to any additional competing bids otherwise received. In total, Citi contacted 10 potential financial buyers and 12 potential strategic buyers on behalf of the special committee. Since the Company's receipt of the proposal letter on December 12, 2015, the Company has not received any actionable offer from any third party for (a) a merger or consolidation of the Company with another company, (b) the sale or transfer of all or substantially all of the Company's assets or (c) the purchase of all or a substantial portion of the Shares that would enable such person to exercise control of or significant influence over the Company. […]

In addition, the special committee and the board of directors also considered remaining as a public company. However, based on the considerations set forth in the section entitled "Special Factors—Reasons for the Merger and Recommendation of the Special Committee and the Company's Board of Directors," beginning on page 31, the special committee and the board of directors have concluded that it is more beneficial to the unaffiliated security holders to enter into the merger agreement and pursue the consummation of the transactions contemplated thereto, including the merger, and become a private company rather than to remain a public company. “

Offer is Not Hostile / The Target’s Board Approved the Transaction

As a general rule, Warren Buffett has said that he never gets involved in a hostile takeover because the outcome is unknown. I have seen plenty of hostile takeover attempts fail, and Boards of Directors have a number of defenses they can put up successfully to keep hostile takeovers from succeeding.

Given that the Buyer is primarily the Chairman of the Board, it’s no surprise that this transaction was supported by the Board after it did its due diligence.

There Are No Financing or Abnormal Contingencies in the Transaction

Some transactions are dependent upon the Buyer raising debt to fund the purchase of the Target. This requirement puts a wrinkle in the transaction if the lender balks for any number of reasons when it is time to fund the transaction. Having to raise debt capital may also indicate the Buyer is not on the kind of financial footing it should be before attempting such an acquisition.

Industrial Bank had provided a debt commitment letter to Jiangsu Panji Investment Col, Ltd, “Panji”) for up to $665 million towards the purchase of TSL. This letter was attached to the SC 13E-3 filing.

Panji provided an equity commitment letter to Fortune Solar Holdings Limited (“Fortune” )for $576 million that was attached to the SC 13E-3 filing, which was amended to $530 million.

Shanghai Xingsheng Equity Investment & Management Co., Ltd. (“Shanghai”) provided an equity commitment letter to Fortune for $211 million that was attached to the SC 13E-3 filing.

Great Zhongou Asset Management (Shanghai) Co., Ltd provided an equity commitment letter to Fortune for $211.9 million that was attached to the SC 13E-3 filing.

Liuan Xinshi Asset Management Co., Ltd. provided an equity commitment letter to Fortune for $70 million that was attached to the SC 13E-3 filing.

Changzhou Ruitai Venture Investment Management Co., Ltd. provided an equity commitment letter to Fortune for $45 million that was attached to later filings.

Given that that 39% of the outstanding shares were rolled into the new entity and not paid out, TSL only needed $1.1 billion to fund the buyout of other shareholders.

Major Shareholders are Supportive

Most of the time, a transaction will require the shareholders of a company to vote for the transaction at a special meeting. If there are a few large shareholders that have agreed to vote for the deal, this may ensure that the shareholder vote will be successful, which is a major step in getting a deal to close.

The deal included a “Rollover and Support Agreement” and between that, and other shareholders, 39% of the outstanding shares were deemed to be voting for the transaction.

Buyer and/or Target Has Skin in the Game

Most merger agreements will provide for either a deposit (in the case of really small deals) or a termination fee in case there is either an overbid or the deal is scuttled by regulators or a breach of the merger agreement by the Buyer. This will make it expensive for the Buyer to fail at getting the deal closed.

Take-private transactions may not always have break-up fees. There was no evidence of such a fee in this transaction.

Regulatory Approval Required

Under the Hart-Scott-Rodino Antitrust Improvements Act and related rules (the “HSR Act”), certain transactions, including the merger, may not be completed until notifications have been given and information furnished to the Antitrust Division of the Department of Justice and the Federal Trade Commission and all statutory waiting period requirements have been satisfied. This applies only to transactions with a value of $80 million or more.

This transaction required minimal regulatory approval. From the SC 13-E:

“The Company does not believe that any material federal or state regulatory approvals, filings or notices are required in connection with the merger other than all approvals of National Development and Reform Commission of the People's Republic of China, Ministry of Commerce of the People's Republic of China and/or State Administration of Foreign Exchange of the People's Republic of China or its designated banks to the extent required with respect to the overseas investment by the Buyer Group in connection with the consummation of the transactions contemplated by the merger agreement, the approvals, filings or notices required under the federal securities laws and the filing of the plan of merger (and supporting documentation as specified in the Cayman Islands Companies Law) with the Registrar of Companies of the Cayman Islands and in the event the merger becomes effective, a copy of the certificate of merger being given to the shareholders and creditors of the Company and Merger Sub as at the time of the filing of the plan of merger and the notice of the merger published in the Cayman Islands Government Gazette.”

Is a Squeeze-Out Included?

There is no squeeze-out in this case, all ADS’s would be cancelled and converted to the right to receive the merger consideration.

Low Competition for the Stock

Why compete against the big boys if we don’t need to? By focusing on smaller transactions we will have less competition for acquiring the block of stock that we want and there is a greater possibility of a wide spread in the deal (difference between the transaction price and what we can buy the stock for).

Given that the outstanding float was equal to $1.1 billion, there was plenty of room for retail investors to get involved, but not much room for large hedge funds who need to put billions of dollars to work.

The Decision to Buy into the Arbitrage

This transaction met all of the most important checklist items:

ü All cash consideration

ü Big fish swallowing a little fish

ü Fair price

ü Little fish profitable and/or valuable

ü Boards approved

ü Major shareholders are supportive

ü No financing or abnormal contingencies

ü Low risk of regulatory intervention

ü Low competition for stock

ü At least a 1% actual return and 20% annualized return

Taking the Position

After filling out my arbitrage checklist and determining that this arbitrage is one that I want to get involved with, I will start taking a position immediately, but buy over time and try to back weight the purchase activity to hold the position for the shortest possible average time.

My initial position was taken December 22, 2016 at a cost of $9.36 per share.

I continued to buy until March 1, 2017 when the price moved up above $10.71 and I had a position size that I was comfortable with ($277K and 28,000 shares).

The Profit

The proper way to analyze your return on investment for an arbitrage situation like this is to weight-average both your holding period and your annualized returns. The reason is that the positions are purchased all along the way and, therefore, the holding period becomes shorter and shorter and the annualized return can grow dramatically.

To illustrate this point, let’s take the first position bought 12/22/2016 as an example. That position was held for 77 days and had an actual return of 23% (including CPR return) and therefore a 109% annualized return. Not too shabby!

Now let’s take the position acquired on 3/1/2017 (14 days before the close). This position was held for 14 days and had an actual return of 7.7%, but an annualized return of 232%!


Key Documents

SC 13-E3

Announcement of Completion of the Merger

Announcement of Extraordinary Meeting of Shareholders

Update on Transaction

Results of Shareholder Meeting
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About the Author

Jeremy Scott Bailey is an investor, author, entrepreneur and host of the "What Works In Investing?" podcast now available on iTunes. He is founder and Chief Investment Officer of Burgeón Group, Inc. an investment advisory firm that provides portfolio management services to families and individuals.

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