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TRC Capital and the Mini-Tender Menace

By Roger Conrad on October 14, 2011

There are two ways to make money in the investment advisory business. The first can take awhile. That’s to build a reputation with integrity, hard work and a little luck from time to time. The other is to find the right angle to make a big score in a hurry.

Neither method is easy. In fact, there are few businesses where the road to success is strewn with so many failures. Nor is there anything inherently wrong with either path. After all, building wealth is what investing is all about.

Every once in a while, however, something reminds me how many unscrupulous people are willing to do anything for a quick buck. This week, it was the latest attempts by TRC Capital to convince fearful investors to part with solid dividend-paying stocks at below market prices, including PPL Corp (NYSE: PPL), PG&E Corp (NYSE: PCG) and Public Service Enterprise Group (NYSE: PEG).

Privately held TRC has been around a while. And as a brief Google of its name makes clear, it’s had a wide range of target stocks over the years, ranging from Anadarko Petroleum (NYSE: APC) to Duke Energy (NYSE: DUK).

TRC’s trademark strategy is to launch an unsolicited “mini-tender” offering to buy a small percentage of a company’s stock BELOW the market price. TRC then sells any shares tendered and pockets the difference. If the share price sinks below the offer price, TRC can walk away. In fact, it can legally keep investors from backing out, literally locking up their shares until it’s profitable to buy them out.

All of the companies listed above have gotten the word out that TRC’s offer is not official. And they’ve urged shareholders to reject it. One can only wonder, however, about investors in companies that didn’t send out press releases, or what happened to those who didn’t get a warning.

“Unscrupulous,” you say? Surely, yes. But there’s nothing inherently illegal about what TRC is doing. Its offers are always for less than 5 percent of companies’ common stock. That means they’re exempt from following Section 14(d) of the Securities Exchange Act of 1934, and are only subject to anti-fraud rules under Regulation 14E.

There’s still disclosure required. For example, TRC is forbidden from making untrue statements or omitting material facts from offerings, meaning it has to disclose the details including any lock-up provisions that prevent investors from pulling out. The catch is only someone who really reads the fine print is going to catch them all.

And as anyone who’s ever read a prospectus knows, it’s easy to overlook some crucial detail. The key is as long as TRC says exactly what it’s doing in its offer sheet, investors who are later dissatisfied with the terms have absolutely no legal recourse. In other words, it’s your fault if you don’t read it before you sign.

What makes mini-tenders like TRC’s so insipid is that back office systems of many brokers don’t distinguish between them and legitimate tender offers. Investors instead get both offers, with no guidance or indication that there’s any real difference.

Worse, the fact that mini-tenders are only for a small number of shares no doubt convinces some investors that they have to act quickly, before others take up the available slots. The temptation to jump is particularly acute in a volatile market like this one. At least, that was definitely the implication from several inquiries I received this week regarding a supposed TRC mini-tender offer for Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF).

Pembina is a Canadian pipeline and energy infrastructure company that’s the exclusive transport services provider for the Syncrude partnership. Run by the Canadian unit of Exxon Mobil (NYSE: XOM), Syncrude is the largest producer of oil from Canada’s tar sands and has big plans for expansion. Pembina makes its money from capacity payments, meaning it gets paid even if Syncrude’s facilities are shut down.

That’s an extremely valuable franchise by any measure. The company also pays a generous monthly dividend of around 7 percent and has held its ground during this year’s selloff. The stock now trades near an all-time high.

I’ve been unable to independently confirm TRC’s offer for Pembina. But even if someone wanted to sell this stock, they’d be far better off selling at market. I fear, however, that some may succumb to the temptation, just as other are doing for the three utility stocks listed above that have responded publicly to TRC mini-tenders.

If I sound strident here, it’s because I am. About 35 years ago, an elderly relative of mine–a widow–was sold an “annuity” by a man who knocked on her door, falsely claiming to be affiliated with a large Christian denomination. Attracted by the high yield offered and wowed by his sales pitch, she took him at his word–rather than asking for documentation or clarification–and lost her savings that had been invested in solid dividend-paying stocks.

It was a heartbreaking thing to later learn about. But it did teach me two very valuable lessons. First, always read the fine print, no matter who you think you’re dealing with. Second, the investment business attracts people with no compunction about cheating others.

That, in my opinion, is what TRC Capital does, quite legally, for a living. And the right answer to any “mini-tender” offer from them or anyone else should be “no thanks.”

That doesn’t mean to ignore every tender offer you receive. Holders of Progress Energy Inc (NYSE: PGN), for example, should certainly vote “yes” and tender their shares to would-be acquirer Duke Energy. Owners of Xcel Energy’s (NYSE: XEL) preferred stocks will be stuck with illiquid securities should they fail to tender their preferred shares this month, per the offer they should now have in their hands.

These are offers that must comply with SEC Regulation 14d. There’s no question about being cheated. The only criterion for tendering or not tendering is the economics of the deal in question, which in both cases is positive.

It also doesn’t mean ignoring every offer that is not governed by Section 14(d). Take for example a takeover offer for a foreign stock you own. Unless the company trades as an American Depositary Receipt in the US, odds are the offer will not be filed under Section 14(d).

That’s the case for Daylight Energy (TSX: DAY, OTC: DAYYF), which has a CD10.08 per share all cash offer on the table from giant Chinese energy producer Sinopec. The takeout price is more than twice where Daylight traded before the offer and so is definitely advantageous to shareholders, even though it’s not covered under SEC Regulation 14d.

You wouldn’t know that, of course, unless you read the fine print on the offer, and therefore know what if any conditions apply before you tender your shares. But mini-tenders should always be avoided, period. And that’s particularly true in a volatile market like this one, where the unscrupulous are all too ready to prey on investors’ fears.

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  1. avatar
    Lula Williams Reply July 27, 2012 at 4:49 PM EST

    Hello, I have invested in AMT and TRC wants to purchase all of the stocks, but I do not want to sell mines. I got a tip from a very good source and I want to hold on to it, I didn’t invest a lot but I do believe that these stocks are going to explode soon. What should I do.

  2. avatar
    Roger Weber Reply March 7, 2012 at 5:34 PM EST

    I received an offer from TRC for Ford (F). They’re at it again, disgusting!!

  3. avatar
    james mayhew Reply March 7, 2012 at 9:17 AM EST

    gteat info on the mini-tenders. i do own f, xel, duk. love those utilities