Cummins’ $1.5 Billion Atmus Exchange Offer Attracts Traders

Cummins Stock Has Gained About 3% Since Start of Offer
Cummins engine showing filters
A diesel engine at the Cummins Inc. Seymour Engine Plant in Seymour, Ind. (Luke Sharrett/Bloomberg News)

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Cummins Inc. plans to distribute its remaining stakes in Atmus Filtration Technologies about a year after carving out the unit in an initial public offering, opening the door for traders to swarm the $1.5 billion exchange offer.

The engine and power generator maker launched a deal last month that allows Cummins investors to swap their shares for Atmus stock at a discount of 7% to a volume-weighted average price, with an exchange ratio of 12.0298. Cummins retained more than 80% of Atmus’ shares following the unit’s initial public offering last May.

Cummins’ exit from the filtration technology provider presents an arbitrage opportunity for event-driven traders. They would potentially profit from the discount in shares they receive in the offer, which is set to expire March 13.

The traders have taken advantage of similar situations in the past, such as the $30 billion-plus stock swap between Johnson & Johnson and Kenvue Inc. last year, the largest of its kind.

Participants in the offering will likely see only part of their Cummins shares exchanged because the offering is expected to receive more orders than there are Atmus shares available. Event-driven traders will seek to profit by accurately predicting the so-called proration, the percentage of the shares submitted that will be accepted for exchange. Cummins expects to accept a maximum of 5.7 million shares, according to a news release March 11.

The proration rate is likely to be less than 10%, according to Michael Broudo, an event-driven equities analyst at Oppenheimer & Co. That’s less than the 25% average proration in the 31 exchange offer transactions he has tracked.

“Each situation is different depending on factors including market capitalizations, with excess volume historically having been a good indicator of predicting the pro-rate,” Broudo said. Excess volume refers to trading in the shares above what would be expected on a regular day.

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The high-stakes event is driving gyrations in both companies’ stocks, as traders seek to lock in their positions and set up the trades. Cummins has gained around 3% since the start of the exchange offer on Feb. 14 while Atmus has climbed about 19%. The shares are likely to be volatile later this week as investors start to unwind their positions.

Traders have also turned to the options market to hedge their positions ahead of the expected volatility. About 24,000 so-called reverse conversions, equal to 2.4 million shares, traded in Cummins listed options. That adds to an existing position of about 95,000 options at those levels. Flexible options are also being used.