US oil and gas producer Diversified Energy (DEC) launched a tender offer on 26 February as an alternative to its dividend for the three-month period to 30 September. In this article we explain why the company has taken this decision and what options investors have.

WHAT IS A TENDER OFFER?

A tender offer is an invitation by a listed entity for investors to sell them some or all of their holding. In order to incentivise holders to sell their shares, these tender offers are typically pitched higher than the current market price of the shares.

WHY IS DIVERSIFIED ENERGY LAUNCHING A TENDER OFFER?

The fundamental motivations for this move are the company thinks its shares are undervalued and the feedback it has received from major shareholders. The shares trade at roughly a third of the all-time highs reached in August 2022.

Some of this weakness is tied to natural gas prices, but the company has also been hit by political pressure over methane emissions and a short-selling attack in January by activist Snowcap Research which claimed a dividend cut was imminent. The latter was swiftly rebuffed by the company.

Saying that, a forecast dividend yield for 2024 of 27% suggests the market is highly sceptical the payout will be maintained. 

WHAT CAN INVESTORS DO?

There are two main options in front of shareholders on the register as of 1 March. They can do nothing, in which case they will receive their dividend of $0.875 as normal on 28 March, or they can waive some or all of their dividend entitlement and instead sell shares in the tender offer.

The price paid will be 105% of the average market value per share for the five business days immediately preceding 27 March. To illustrate, if this matched the current price of 938.5p, then you would receive 985.4p. Importantly, you can only tender shares up to your allocation but you can tender some shares and still receive a part of your dividend entitlement.

The waived entitlement will be calculated by multiplying the number of shares tendered by the tender price, and the exchange rate which determines the entitlement will be revealed on or around 20 March.

WHAT WILL HAPPEN AFTER THE TENDER OFFER?

The company has made clear it will only allocate around $42 million – the same amount as the cost of the dividend – to this return of capital, and once purchased the shares will be cancelled. As with any share buyback, reducing the number of shares in issue means the amount of earnings and dividends attributable to each individual share goes up.

A back of the envelope calculation suggests if all investors were to take the tender offer option there would be a reduction of around 9% in the number of shares in issue. 

TIMETABLE

29 Feb – Q3 ex-dividend date

1 Mar – Latest date for shareholders who wish to participate to become qualifying shareholders

19 Mar – Publication of Q4 and full-year results

20 Mar – Announcement of exchange rate for Q3 dividend

26 Mar – Announcement of tender price

27 Mar – Closing date for tender offer, trades made and results announced

28 Mar – Q3 dividend paid and settlement of tender offer in CREST

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