TPC Bid Seen Rising as Options Traders Bet on $5 Boost

Traders are betting TPC Group Inc. will win America’s biggest takeover price increase, spurred by one of the chemical producer’s largest shareholders lobbying against the current proposal.

Shares of TPC, the biggest maker of an ingredient used to make synthetic rubber, ended last week 2.6 percent above the $40-a-share deal from First Reserve Corp. and SK Capital Partners LP, signaling arbitragers who wager on mergers and acquisitions anticipate a higher offer. No other U.S. agreement valued at $100 million or more is trading that far above the proposed price, according to data compiled by Bloomberg.

Sandell Asset Management Corp., the third-largest shareholder, last week called the bid “grossly suboptimal” because demand for butadiene, the product used in synthetic rubber, will probably rise. WallachBeth Capital LLC says $45 a share may be fair, and TPC’s call-option trading surged to a record on Aug. 30 with volume concentrated on that price. Shareholder Eagle Asset Management Inc. said the bid for Houston-based TPC, which reached an all-time high of $47.03 in March, should be around $50, if not higher.

“How are we selling it at a discount to where it was back in March?” Eric Mintz, a St. Petersburg, Florida-based fund manager who helps oversee $7 billion at Eagle Asset, said in a telephone interview. Eagle Asset owned a 2.8 percent stake in TPC as of June 30, data compiled by Bloomberg show. “It’s trading at a premium to the takeout price, suggesting the market is expecting a higher bid right now,” he said. “The price should definitely be above $40.”

‘Comprehensive Review’

Caroline Harris, a spokeswoman for Greenwich, Connecticut-based First Reserve who works for Prosek Partners, and James Marden, a spokesman at New York-based SK Capital, declined to comment on whether the firms are considering raising their bid.

The transaction “is the result of a comprehensive review of the strategic and financial alternatives available to the company and provides our stockholders with an immediate cash premium for their valued investment,” Meaghan Repko, a TPC spokeswoman who works for Joele Frank Wilkinson Brimmer Katcher, said in an e-mail. “TPC Group believes this transaction appropriately recognizes the value of the company’s business and prospects and is in the best interests of its stockholders.”

Today, TPC shares rose 2 percent to $41.86, closing at the highest price since May 8.

TPC, formerly known as Texas Petrochemicals Inc., produces rubber component butadiene. The company’s origins date back to a pair of plants built by the U.S. government to make synthetic rubber during World War II.

Bullish Outlook

The chemical producer, which competes in the market for butadiene with LyondellBasell Industries NV, Royal Dutch Shell Plc and Exxon Mobil Corp., is now planning to boost its output by refurbishing a Houston plant to make the chemical from butane, a component of gas that has increased in supply with production from shale rock formations.

The private-equity firms that agreed to buy TPC probably did the deal because of their bullish outlook on butadiene, said Daniel Rizzo, a New York-based analyst with Sidoti & Co. The takeover doesn’t have the hallmarks of a traditional private-equity deal focused just on cash generation, he said.

“This is all about getting involved with processing butadiene,” Rizzo said in a phone interview. “People have a very bullish outlook on butadiene prices and demand, and TPC is one of the few pure-play processors of butadiene.”

Exclusive Talks

The stock surged 16 percent to $38.97 on July 25 after Bloomberg News reported that TPC was in exclusive talks to go private. The company would fetch about $40 a share, people with knowledge of the situation, who asked not to be identified because the discussions were private, said at the time.

The negotiations followed talks earlier in the year that collapsed after a jump in TPC’s share price, the people had said. TPC doubled in the first three months of the year to a record $47.03 on March 16.

TPC disclosed on Aug. 27 that First Reserve and SK Capital agreed to acquire the company for $40 a share, representing just a 1 percent premium to the prior closing price. It was 20 percent higher than TPC’s closing level on July 24, before the shares surged.

Thomas E. Sandell, chief executive officer of New York-based Sandell Asset Management, wrote a letter to TPC’s board on Aug. 28, calling the $40 bid an “outrage” and an attempt to steal the company at the bottom of the industry’s cycle. If the company hadn’t received an offer, it would have climbed to $55 to $57 in the next 12 months, he wrote.

Vote Against

In an interview on Aug. 31, Sandell said he’d increased his TPC stake to 7 percent of the company’s stock.

“We intend to vote down this deal and to run a proper auction for TPC to maximize shareholder value,” he said.

Sandell’s company reiterated its opposition to the deal in a white paper today, saying “we believe that several strategic and financial parties were shut out of the process and/or subjected to unreasonable demands and unreasonable timelines.” TPC’s fair value in a takeover should be $62 to $71 a share, according to Sandell’s report.

“You’ve got to think they could have done better,” said Louis Meyer, a New York-based special situations analyst for Oscar Gruss & Son Inc. “It’s being sold at a price that wasn’t reaching for the moon, that’s for sure. This thing should at least have something in the mid-$40s.”

While TPC said on Aug. 27 that stockholders with about 22 percent of its outstanding shares support the deal, the stock ended last week at $41.03, or $1.03 above the agreed price.

Lower Odds

“The further it trades through and the longer it trades through will decrease the chances that they get the shareholder vote,” Peter Lobravico, New York-based vice president of merger arbitrage trading and sales at Wall Street Access Corp., said in a phone interview.

The offer should have been $45 to $46 a share “right out of the gate,” said Yemi Oshodi, New York-based managing director of M&A and special situations at WallachBeth. That would have been at least a 34 percent premium to TPC’s price on July 24, before takeover speculation surfaced. At the time, analysts had an average 12-month share-price estimate of $46. The figure then increased to almost $50 before the companies disclosed the deal terms, data compiled by Bloomberg show.

“The price they’re paying seems to me to be a little low,” Oshodi said in a phone interview. “It’s in their best interest to quickly throw something out there and quell the expected uprising of shareholders.”

The price would need to be around $50 a share or more for Eagle Asset to be on board, Mintz said. His estimate is based on the replacement value of TPC’s assets and its earnings potential. Eagle Asset owns more than 400,000 shares.

Earnings Estimates

Earnings-per-share could approach $10 to $15 by 2015, according to Edward Yang, an Austin, Texas-based analyst with Oppenheimer & Co. TPC earned $2.28 a share in fiscal 2011, data compiled by Bloomberg show.

First Reserve and SK Capital’s bid values TPC at 7.8 times the last 12 months of earnings before interest, taxes, depreciation and amortization. Chemical deals larger than $100 million have gone for a median of 8.7 times trailing Ebitda, and those announced in the past year fetched a multiple of 7.5, according to data compiled by Bloomberg.

It wasn’t a “knockout” multiple, so “perhaps there is room for a higher price from First Reserve and SK Capital or another buyer,” Wall Street Access’s Lobravico said.

The private-equity firms may be less able to increase their bid than a company operating in the chemicals industry, Lobravico said.

Deal Math

“Private-equity firms are harder to get a price bump out of than a strategic buyer,” he said. “Private equity strike these deals based upon certain math.”

Still, options traders are becoming increasingly convinced TPC will sell for more. Trading in bullish TPC options reached a record on Aug. 30 when 2,162 calls to buy the stock changed hands. That was 17 times the four-week average and compared with 435 contracts for puts to sell, data compiled by Bloomberg show.

The most-traded options were December $45 calls, which had volume of 1,373 contracts. Almost all of them changed hands on the ask price, indicating buyers initiated the transactions.

“Options traders are betting on a deal over $45,” Chris Rich, head options strategist at JonesTrading Institutional Services LLC in Chicago, said in an interview. “Could a deal happen above $45? The buyers of the December $45 calls think there is a chance.”

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