Altria (NYSE:MO) is taking fire from all sides as its bet on electronic cigarette maker Juul Labs looks to be going sideways. Shares of the tobacco giant have plunged 20% over the past month as the Food and Drug Administration and Federal Trade Commission opened probes into Juul, and questions are growing about the safety and efficacy of vaping as more than 500 cases of serious illness have been reported, including eight deaths as of early Friday.
Altria's stock now trades at $40 a share, almost 40% below its 52-week high, and it's possible it could fall lower still since the $12.8 billion investment in Juul seems ill-fated.
A willing buyer
So investors who recently received a mini-tender offer from TRC Capital, a privately held development and investment firm, to buy their shares for $40 each might think it's a good opportunity to get out of what is increasingly looking like a falling knife. They should think again.
Investors are undoubtedly familiar with tender offers. Typically an investor looking to take over a company will offer to buy shares, usually at a premium to the current price, in order to entice you to sell your stock to the investor. A mini-tender offer is a slightly different animal.
While an investor is still looking to purchase shares, it's for less than 5% of the company, and the offer is often for less than the value of the stock. Although TRC's mini-tender offer for 3 million shares of Altria is actually the same as the tobacco company's current stock price, that's only because it amended the offer from the $44.40 proposal it had made just a few days prior.
TRC Capital has made something of a cottage industry out of mini-tender offers for companies. Despite there being nothing inherently wrong or illegal about a mini-tender offer, investors would still be wise to ignore most solicitations received. Here are four reasons.
1. They're largely unregulated
Traditional tender offers are highly regulated, and companies must follow strict Securities and Exchange Commission rules to ensure all shareholders are treated fairly. Mini-tender offers, because they're for a small percentage of the company (TRC is looking to acquire just 0.2% of Altria's outstanding stock), bypass many of the rules otherwise imposed. So long as TRC doesn't outright lie in its offer, it passes under the SEC's radar.
2. Even the SEC urges caution about mini-tender offers
The regulatory body warns that mini-tender offers "have been increasingly used to catch investors off guard" and reiterates that none of the protections investors have with regular tender offers exist with mini-tender offers.
3. They're often designed for novice investors
New investors may have heard that under the rules of tender offers, they can change their minds on selling their shares, but might not know that under mini-tender offers, once you've made the decision to sell, you cannot back out of the deal.
4. They're often a way to make a quick buck
Mini-tender offers that undervalue a stock can net the buyer a fast profit if it acquires the shares at a discount and then turns around and sells them at the elevated price. For Altria, it may be that TRC Capital actually thinks the downturn in the tobacco company's stock is temporary and it is hoping to acquire millions of shares that will eventually go for a premium on the market.
Companies making mini-tender offers don't have to notify the target company they are making the bid, unlike with regular tender offers, so the targeted businesses often don't even know an offer is out there.
But Altria does know of TRC Capital's mini-tender offer, and it recommends investors ignore it because it is "conditioned on there having been no decrease in the market price of Altria common stock," as well as other caveats like obtaining financing.
Since shareholders don't have to follow through on a mini-tender offer, investors would be wise in following Altria's advice here.