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Thursday, July 22, 2010
Obscure merger arb
Disclaimer: At the time I last did this analysis, PRS.MC was priced at 1.81 euros, so the evaluations below are made w/ that input. Adjust accordingly for the current market price of PRS.MC.
Short LIA, long PRS.MC, and also get long EUR.USD (=USD/EUR) if you want to hedge currency risk of the trade (as an independent trade, I wouldn't considering going long USD/EUR prudent at this time, as a trendfollowing system, which works over time, would dictate a short position at this time). PRS.MC details here: http://finance.yahoo.com/q?s=PRS.MC
Here's the rationale:
LIA is a blank check company. They have a bunch of cash sitting around waiting for the management buyout "pros" to do something with it. They've finally decided to blow it on something. Here's the deal:
On p. 9 of the presentation, you will see that every share of LIA will get 1.173 shares of ordinary PRS.MC, and .563 shares of the NVCS of Prisa.
The 1.173 shares of ordinary Prisa is easy enough to value-> (1.173 shares)*(1.81 Euros/sh)*(1.196 USD/EUR) = around $2.54 USD.
The terms for the NVCS shares are listed on p. 3 of the presentation. It's a little messy, but it looks like for each NVCS, you get a 7% of 7.331 Euros annual dividend for 5 years, and after 5 years, the NVCS will likely be redeemed for ordinary PRS.MC shares at a conversion rate that decreases if more dividends have been paid. If no dividends are paid, the 7.331 "stated value" is retained till the conversion time, and you would basically get almost 2 ordinary PRS.MC shares per NVCS at that time. Essentially, the more dividends are paid, the lower the "stated value" that remains in the NVCS, and the fewer ordinary shares of PRS.MC you'd get when the NVCS is finally converted. Also, Prisa retains the right to choose whether the issue a dividend, thereby decreasing the "stated value," or retaining the "state value" of the NVCS, so Prisa can game the choice to its advantage depending on the price of ordinary PRS.MC shares. This Prisa option decreases the value of an NVCS to the investor from what it would be without the option. With a lower value of PRS.MC shares, Prisa will withhold dividends. In the end, assuming no dividends are issued and the "stated value" of the NVCS remains intact until the end, then you will get almost 2 PRS.MC shares per NVCS. The math they used to calculate the "target value per Liberty share," given their assumptions about the current price of a PRS.MC share and the exchange rate assumption, supports this interpretation.
Problem is, the price of a PRS.MC share has dropped from the assumed price of the presentation, and the EUR/USD exchange rate has dropped as well.
Now you get $2.54 worth of ordinary shares and .563 shares of an NVCS worth 2*.563*1.81 Euros*1.196 USD/EUR = a total of $5.08 of PRS.MC stock for each share of LIA.
Your catalyst for convergence will obviously be when the LIA is actually converted to those other shares, if it doesn't drop in price before then. LIA is currently priced at almost $10. The stock is reasonably thick, so you could probably short at least 100K shares while still being able to get out of all of them fairly easily should something unforseen occur.
I typically dislike merger arb, but in this case, whether the deal goes through or not, the risk of a price increase in LIA is diminished. It was overpriced before it decided to blow its money buying this thing. If you look at the record for blank check companies (SPACs) in general, it's terrible. LIA got on my radar originally for being priced at a steep premium to NAV (basically cash). If the acquisition doesn't proceed, then nothing much should happen to LIA's price.