Untying the Knots: Simplifying Corporate Actions

Understanding the impact of corporate actions is necessary when contemplating the right investment strategy. This impact is driven by timely awareness, accuracy, and attention to detail. In this blog, the S&P Global Corporate Actions team will discuss some of the most dominant corporate actions announced each month and the roles they take in the marketplace.

The Sri Lanka Economic Crisis

After years of political and economic mismanagement under President Gotabaya Rajapaksa, the country of Sri Lanka finds itself on the brink of bankruptcy as it suffers from its worst economic crisis in history. This recipe for disaster consists of many ingredients, but analysts claim that the most prominent of them all point to the country's 'twin deficit' economic structure [1]. This structure means that the country's "national expenditure exceeds its national income, while its tradeable goods and services production remains inadequate." Such a structure eventually leads to an outflow outbalance to its inflow [ 2].

While many say such a downfall was bound to happen due to the country's twin-deficit model, it can be argued that the situation was quickly accelerated due to the deep tax cuts implemented by President Gotabaya Rajapaksa months prior to the COVID-19 pandemic. We've all heard the stories of how companies and countries struggled to stay afloat during the pandemic, but for a country where tourism and foreign workers' remittances fund most of its GDP, the hit strikes at another level. In two years, the country's foreign exchange reserves plunged by almost 70% and dropped below USD 50 million.

First comes disaster, then comes default…

While citizens continue to struggle with acute shortages of food, medicine, and fuel, the country is also dealing with the repercussions of steep inflation. In March 2022, Sri Lanka devalued the Sri Lankan Rupee to encourage remittances and qualify for a loan from the International Monetary Fund (IMF). This attempt for resolution resulted in a plunge of the Rupee against the US dollar by approximately 32%.

With soaring inflation, an insurmountable debt, loss of foreign exchange reserves, and a devalued currency, Sri Lanka announced their default on its entire USD 51 billion worth of debt [3].

How are Corporate Actions taking the news?

Sri Lanka's Colombo Stock Exchange (CSE) halted trading from April 18 to April 22, affecting a number of securities set to pay Cash Dividends within this period. A few examples consist of:

Sri Lanka's CSE trading also halted shortly after the market opened on April 25, as the country's blue-chip index sank by 12.6% leading to an all-day suspension [4].

Most recently, the CSE declared last Tuesday, May 10, a market holiday as a nationwide curfew was imposed due to the political unrest resulting in a shutdown of the Central Depository System. The exchange states that it will resume trading from Thursday, May 12 onwards [5].

As Sri Lanka continues to seek assistance from the IMF to resolve the current economic crisis, the world continues to watch as Sri Lanka embarks on its journey to political and economic reforms while our S&P Global Corporate Actions team continues to track bond defaults, most actively impacting the upcoming July 2022 payment.

Déjà vu?

Every few months, a story or announcement is published on the world wide web that takes the social and financial worlds by storm—for example, GameStop, US Debt Ceiling, Activision, etc.

So, what's on the agenda this month?

Elon Musk's proposal to acquire Twitter, of course.

While there are many different lenses to review such an announcement, one of the most exciting elements, which just so happens to pertain to corporate actions, is the fact that the company would transition from publicly listed to private-held. Now before we dive into the details, it is critical to understand the difference between the two.

At a foundational level, a public company refers to a company that is listed on a stock exchange in the country where the company operates. Its securities are traded publicly, which means that any person can purchase the shares and become an owner, or at least part owner, of that company. On the contrary, a private company refers to a company that is not listed on any stock exchange, and only the company members hold its shares.

In most cases, the stories/events you hear are companies going from private to public. And understandably so. By "going public", companies can raise more capital than private investments alone since millions of people can contribute towards the capital required due to public trading. But what about the cases like Twitter making the opposite move from public to private?

While there are a few different reasons a company might make such a decision, the most common scenario is when a buyer acquires most shares and takes the company private. This usually happens when a company is undervalued in the market, which the buyer then attempts to acquire at a low price.

Is that what's going on with Twitter?

You could say so. The agreement has all the makings of your "typical" public to private move. However, the industry cannot help but beg the question of whether we are seeing another Tesla scheme. As many of you may recall, Elon Musk tweeted (full-circle moment) in August 2018 that he was considering taking Tesla private at USD 420 a share. Upon this announcement, Tesla's stock price skyrocketed toward to USD 387, a 14% surge, before finally closing at USD 379. In the end, the company stayed public [6].

Now in 2022, Elon Musk has done it again. Given that the fine print details are different from the Tesla case, the concept is still the same. However this time around, the response is very different from that of the Tesla case in that the implied probability of the deal closing at that price fell below 50% when Twitter shares hit USD 46.75. The market suggests investors have doubts about whether Musk will get the deal done at the original price or why he is attempting to do so at such high levels. We've heard of go-getters, but what happens when it doesn't make sense?

For now, only time will tell. The S&P Global Corporate Actions Team continues to track the news surrounding the deal, setting up the appropriate Merger corporate action that remains pending as well as the Rights Adoption Plan (commonly referred to as a Poison Pill) enacted by Twitter "to protect stockholders from coercive or otherwise unfair takeover tactics."

Parting Ways: The Corporate Exodus from Russia

Some of the world's largest companies have decided to withdraw, suspend, or scale back their operations in Russia in response to its invasion of Ukraine. This large-scale exodus has impacted industries across the spectrum, from social sectors tied to Food & Beverage or Media & Entertainment to more infrastructural sectors like Energy or Automotive.

Many companies have enabled these actions to meet the rising demand for economic sanctions, shareholder sentiment, and supply chain challenges, whether by choice or not.

So, just how large of an impact is this making? Here are a few of the largest companies fleeing the scene:

Food & Beverage

In March of 2022, fast-food giants McDonald's and Burger King, owned by Restaurant Brands International, decided to exit the Russian market.

McDonalds certainly had the much tougher choice of the two to make, as 84% of McDonald's locations in Russia are operated by the company. Temporarily closing its restaurants left a lot of food and money on the table, suffering losses of around USD 127 million just last quarter. Mcdonald's walked away from nearly USD 100 million in inventory costs plus another USD 27 million in leases, supplies, and staff costs [7].

On the other hand, Burger King was a different 'burger' altogether, as they do not have any corporate restaurants in Russia. Their business is fully franchised and run by a local master franchisee. Nevertheless, they wanted in on the action as well. Burger King announced to suspend all corporate support for the Russian market, including operations, marketing, and supply chain, and publicly refused approval for investment expansion [8].

Coffeehouse chain giant Starbucks, announced its suspension of all business activity in Russia, including shipping products and the temporary shutting down of stores. The company has about 130 outlets in Russia and Ukraine, all licensed locations. Fortunate for Starbucks, both the Russia and Ukraine markets only account for less than 1% of the company's global revenue [9].

Media & Entertainment

Relatively new to the Russian market, Netflix, Inc. first launched its service in 2016. Since then, they've managed to procure roughly one million subscribers, a drop in the bucket compared to the 222 million subscribers globally. Initially, the company announced they were suspending all future projects and acquisitions from Russia. Days later, the company took it one step further and shut down its service entirely. As you can imagine, this didn't sit well with Russian subscribers, who pay GBP 5.55 - GBP 9.26 a month to access the content. So much so that on April 13, Russian law firm, Chernyshov, Lukoyanov & Partners launched a class action lawsuit against Netflix with the Khamovnichesky district court in Moscow, claiming violation of users' rights due to Netflix's unilateral refusal to provide services in Russia [10].

Warner Bros. Discovery (formerly WarnerMedia before spin-off and merger with Discovery, Inc on April 8th), on February 28, announced it would halt the movie release of "The Batman" in Russia. The company also suspended broadcasting of its channels, planned theatrical and games releases & new content licensing with Russian entities.

Automotive

Chrysler-parent Stellantis N.V. recently announced it was suspending its manufacturing operations in Kaluga due to increased Western sanctions and logistical difficulties. They committed USD 1.1 million in humanitarian aid for Ukrainian refugees in March [11].

Ford Motor Company, the second leading car brand in the US, based on 2021 vehicle sales, announced back in March they were suspending, effective immediately, commercial van manufacturing and Russian sales with minority interest joint venture partner Ford Sollers. Ford also agreed to make a USD 100,000 donation to the Global Giving Ukraine Relief Fund to assist Ukrainian citizens and families displaced from this crisis [12].

General Motors Company, a minimal presence in Russia, with only about 3,000 vehicles sold a year via exports, said it was halting shipping until further notice. Local production of vehicles has been suspended since 2015. GM dealers in Russia won't be compensated either for their investment in dealerships and are negotiating with GM to provide service and warranty work on cars sold in the country [13].

Energy

The Energy sector appears to have been hit the hardest by the unfortunate chain of events in the region, with companies suffering losses in the billions.

BP Plc, the British oil and gas company, announced it would exit its 19.75% shareholding in Russia's largest oil company, Rosneft, bringing almost three decades' worth of operations. Rosneft accounts for around half of BP's oil and gas reserves and a third of its production. Such a loss could result in the company taking up to USD 25 billion [14].

Exxon Mobil Corp, which operates the Sakhalin-1 project, an international consortium comprised of Japanese, Indian & Russian companies to produce oil and gas, announced it would discontinue the operation and exit the venture. The move comes with a heavy price tag as the company takes a 3.4 billion dollar hit, chipping away at the reported USD 5.4 billion in profits during the first quarter [15].

Shell Plc, announced it could lose up to USD 5 billion in quarterly profits from its decision to pull out of its projects in Russia. Shell plans to take a phased approach, gradually withdrawing its involvement in all Russian hydrocarbons, including crude oil, petroleum products, gas, and liquefied natural gas (LNG). As a first step, the company will cease all spot purchases of Russian crude oil and will also shut down its operation of service stations, aviation fuels, and lubricants [16].

By some estimates, as many as almost 1,000 companies have made operational changes to some degree, in most cases, beyond the bare minimum required by international sanctions.

Where the future takes us from here has yet to be determined. Rest assured that S&P Global Corporate Actions will be watching as we continue to analyze the impact made on corporate actions.

Another Supply Chain Disruption?

The common theme for the year 2022 has been (and remains) 'the year of the global supply chain challenge.' From truck drivers to semiconductor chip shortages to shipping containers, it seems that no sector has been left unaffected by the volatile demand during the COVID-19 pandemic and, even more now, the Russian invasion of Ukraine. That said, the world of corporate actions has seen various offers promoting either divestitures, takeovers, or reorganizations, depending on the company's path to confront the issues at hand.

One of the latest shortages to strike fear into the hearts of U.S. consumers is the severe pilot scarcity found among airlines. Just as countries are beginning to re-open their gates from the COVID-19 pandemic, consumers are itching to feel the freedom they once felt to travel at their leisure sooner rather than later. However, it seems that what consumers are getting instead are sky-high ticket prices and more and more flight cancellations.

So, what's an airline to do?

"Poach each other's pilots at a stunning level of aggression", of course. American 737 Captain and Union spokesperson Dennis Tajer stated that airlines are struggling to stay afloat. A primary driver of this is the all-time high need for experienced and qualified pilots [17].

This level of aggression is most evident through JetBlue's now third-time bid to buy Spirit Airlines, taking the request from an initial offer to an all-out hostile takeover. In February 2022, Frontier Group Holdings, Inc. and Spirit Airlines, Inc. announced a definitive merger agreement whereby the companies would combine to create America's most competitive ultra-low fare airline. According to the terms of the Merger, Spirit shareholders would receive 1.9126 shares of Frontier plus USD 2.13 in cash for each existing Spirit share they own, valuing the transaction at USD 2.9 billion [18].

What started (and remains) as a unanimous approval from both company's boards of directors, JetBlue came to disrupt the peace in April 2022 with a surprise bid for Spirit Airlines in an all-cash offer of USD 33 per Spirit share held, valuing the transaction at USD 3.6 billion [19].

USD 3.6 billion versus USD 2.9 billion? What's the holdup!?

The most prominent argument put forth by Spirit's board of directors thus far is that they simply do not think U.S. regulators will approve the JetBlue acquisition proposal. However, JetBlue isn't buying that rationale, claiming it to be "a smokescreen to distract." And they aren't going down without a fight [20].

There are three common strategies a hostile bidder could take to push through a transaction: a proxy vote, a tender offer, or a large stock purchase. And in the case of JetBlue and Spirit Airlines, JetBlue is pulling out two of those tactics [21].

JetBlue offered Spirit shareholders USD 30 a share as part of a tender offer and, in a proxy statement, urged them to vote against the Frontier deal in an upcoming Spirit shareholder meeting set to occur on June 10. The company also said its earlier offer of USD 33 per share is still on the table if Spirit decides to negotiate.

There is a lot at stake for all three companies at play. Should the Frontier and Spirit transaction succeed, the combined airline could become the U.S.'s fifth-largest carrier, resulting in a potential fall for JetBlue from sixth (where they currently stand today) to seventh-largest carrier. Then, on the other hand, if the JetBlue and Spirit transaction were to succeed, the combined airline could potentially carry over 50% of Florida's airport passengers, which could instead bump up their placing on the list of top U.S. airlines.

A fleet of airbus planes, trained and qualified pilots, and the ability to better compete against the "Big Four" U.S airlines? JetBlue says, "Yes, Yes, and Yes." Updates to follow post the June 10 Shareholder Meeting.

Interested in more? Please find:

Managed Corporate Actions' February Postings

Managed Corporate Actions' January Postings

Managed Corporate Action's November Postings

Managed Corporate Action's October Postings

Managed Corporate Action's September Postings

Managed Corporate Action's August Postings

Managed Corporate Action's July Postings

Managed Corporate Action's June Postings

Posted 29 April 2022 by Madhu Ramu, Managing Director, Corporate Actions, S&P Global Market Intelligence

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.