Investment thesis – bet on higher takeover price from AMC as CKEC shareholder will reject the current offer due to price being too low
Carmike Cinemas (4th largest movie theater company in US) is in the process of being bought by AMC Entertainment (2nd largest). This M&A would create the largest movie theater chain in US with obvious benefits and large synergies for AMC.
Carmike Cinemas trades at $30.47 vs. current takeover price of $30.00.
Shareholder vote is scheduled for 30th June 2016. Some of the largest shareholders (Mittleman Brothers, Dreihaus Capital) have indicated that they will vote against the deal. Institutional advisory services (ISS and Lewis Advisors) also issued advice to vote against the deal – passively managed funds (Vanguard and etc.) usually vote their shares based on these recommendations. Summing all votes up (and counting non-voters as “No”) suggest the takeover under current terms will be rejected by CKEC shareholders.
Analysis/presentations by the parties mentioned above suggests that even at $40-$50 share CKEC takeover would be highly acretive to AMC.
Scenario 1. AMC increases the offer before the shareholder vote on the 30th of June – July ATM and OTM call options offer favorable risk/reward.
Scenario 2. Shareholders reject the current offer. AMC takes time to reconsider and gives higher offer in the coming months. In the meantime other parties might get interested as well - December ATM and OTM call options offer favorable risk/reward.
Scenario 3. Shareholders reject the current offer and AMC looses interest. CKEC starts trading at standalone value – in this case CKEC might revert to pre-merger price of $20/share (merger was announced during the bottom of the Feb market sell-off), however keeping in mind the reluctance to sell by major shareholders, CKEC undervaluation relative to peers and higher number of shares that changed hands at $30/share over the last four months, I see share price stabilizing at $30+. Equity might be the safest way to play this scenario.
Scenario 4. Shareholders accept the current offer – in this case it is a loosing trade, but I see low likelihood of this.
I am personally playing this with Dec call options with $30 strike, which currently trade at $0.8.
Mittleman Brothers presentation - https://dc.aws-sec.akadns.net/Archives/edgar/data/799088/000114036116069523/ex99_1.htm
Dreihaus Capital presentation - https://dc.aws-sec.akadns.net/Archives/edgar/data/799088/000119312516616208/d207937dex3.htm
ISS and Lewis Advisors recommend ‘NO’ vote - http://www.bloomberg.com/news/articles/2016-06-17/carmike-shareholders-should-oppose-takeover-glass-lewis-says