Current Price –$23
Offer Price – $25+ (expected)
Upside – 10%+ (expected)
Expiration Date – 13th of December, 2016
This is a very simple and straightforward idea.
IQNT entered into agreement to be acquired by GTCR at $23/share. The deal was signed on the 2nd of November and the shares have traded at or slightly below that level since. The acquisition agreement also included go-shop period:
“Under the terms of the agreement, for a period of 30 calendar days, Inteliquent may solicit alternative proposals from third parties. Inteliquent does not anticipate that it will disclose any developments with regard to this process unless and until the Inteliquent Board of Directors makes a decision with respect to a potential superior proposal.”
Right after the expiration of the go-shop period (2nd of December) the company disclosed the below statement which was buried in the proxy filling (no press release or anything like it).
“After the announcement of the transaction and the commencement of the “go shop” period, Company senior management and Perella Weinberg Partners, at the direction of the Board and the transaction committee, contacted or responded to inbound interest from 43 market participants about pursuing a strategic transaction with the Company, including 13 strategic buyers and 30 financial buyers.”
This is a stunningly high number of interested parties. And although most of them probably have shown only the initial interest, there is a chance that at least couple of those are seriously considering bidding for IQNT. My understanding of the proxy is that IQNT can still continue the discussions with the parties that have shown interest until 13th of Dec and after this date go-shop period will fully end.
If another bid emerges it will likely be at least 10% higher. If no other bid emerges, the shares will probably trade around $22.8-$22.9 (i.e. 0.5%-1% loss). Upside/downside ratio seems to be quite favorable.
The biggest risk here is that the IQNT/ GTCR transaction gets cancelled – pre-merger announcement shares were trading at $17. However, as my time-frame is couple of weeks only until it is fully evident whether there is another bid or no, the probability of deal getting cancelled in the meantime is very low.
One can simply buy a Jan $22.50 put for $25 and protect against cancellation risk. Then risk/reward picture looks like this at current price:
Risk: 3.2%
Reward: 10%
So if you think there’s more than a 1:3 probability that a higher offer emerges, it’s a good trade.
I have as a straight equity. I do not think shares will drop below $22.5 in the upcoming weeks due to $23 offer by GTCR, however if you are concerned about the risk, then purchasing put would make sense. Dec puts are even cheaper and the expire after my target date of 13th of Dec.
Great idea, thanks for sharing DT. Quick position sizing question. My first instinct here is to be relatively aggressive about position sizing because the stock is liquid with an $800M market cap (I.e not a micro-cap). Do you have a position sizing rule of thumb for (apparent) skewed risk/reward specs like this one? Also, why no press release since going public would promote bidding competition among the different players and also pressure GTCR to raise their offer? The discrete disclosure part doesn’t make sense to me.
I view these type of trades as cash alternatives as I see limited downside risk, however I rarely invest more than 5% of portfolio in a single special situation.
With regards to press release, see the quotes above – in the first one management stated that a press release will be issued only if BoD makes a decision with regards to superior proposal. There might be some other reasons that I am not aware of which incentivize BoD to go with GTCR offer instead of alternative proposal.
Thanks for sharing this idea. If there’s no news / announcement of another bid, how far past 13 December do you intend to hold before exiting? Should we be selling now?
I would expect the company to announce the results of these discussions today or in the upcoming days (will try to reach out to IR to check on this). If there is no PR for a few days then my guess is that no other parties were interested.
If there are no other interested parties, then price is likely to drop slightly below $23/share and then eventually close at $23 upon merger.
As shares are so far trading at a slight premium to acquisition offer, market seems to think that there is a slight chance of higher offer. Market can obviously be wrong.
New proxy today:
“Despite continuous and significant efforts from the Company and its advisors during the “go shop” period, none of the potential strategic or financial buyers contacted by the Company or its advisors submitted an alternative proposal.”
So no other parties showed interest in buying the company.
I closed my position this morning at a 0.2% loss. Alternatively one can hold till the shareholders meeting in mid Jan 2017 when the merger will likely be approved, then the shares would be cashed out at $23 without any loss.
This was a solid idea. These ‘go-shop’ tend to work out some times, risk is minimal and when when these work out returns are substantial. So keep on posting these. Thanks.
I like these ‘free option’ situations and do not mind participating in these even if they do not always work out. There is no capital loss (almost) and that is the most important.