Current Price – $4.59
Expected Payout – $4.86
Upside – 6%
Expiration Date – Q1 2018
This is a cross-border merger arbitrage with consideration to be paid in a combination of cash and stock. At current prices usd/gbp exchange rate the upside is 6%. I believe the deal is very likely to close as expected as the largest shareholders and insiders of both companies are supporting the transaction.
This is a merger arbitrage idea that was suggested by one of the members (thank you Greg).
Background
On the 5th of Sep 2017 RhythmOne PLC (listed in London, ticker RTHM) entered into definitive agreement to acquire YuMe. Each YuMe stockholder will be entitled to receive:
- $1.70 in cash
- 0.7325 of RTHM shares.
- At current exchange rate this is equal to $4.86 per share of YuMe
- Borrow of RTHM for the short leg of the trade is cheap <1%.
Both YuMe and RhythmOne operate in ad-tech space and seem to be somewhat complimentary to each other. From the circular:
” The combination of RhythmOne and YuMe will bring together demand-side and supply-side strengths in the fast growing segments of mobile, video, connected TV and programmatic trading.
YuMe’s strengths lie in demand-side software and services used by brands, agencies and trading platforms, a robust, first-party data management and targeting platform and global programmatic capabilities. The Company’s (i.e. RTHM) strengths are primarily focused on the supply-side, as well as programmatic platform capabilities represented by its multi-channel, multi-format ad exchange, whereby advertisers and agencies can reach targeted, engaged audiences at scale.”
Merger is conditioned on 50%+ of YuMe shareholders tendering their shares and on YuMe having at least $32m of cash on the balance sheet. The latter does not seem to be an issue as YuMe had $38m in cash (excluding dividends that were paid out) at the end of Q2 and is generating cash every quarter.
YuMe shareholder approval
YuMe has already secured agreements to tender for 31.6% of the shares, including all the largest shareholders and all insiders. Thus only a quarter of the remaining shareholders need to tender for the transaction to happen – I consider this to be an easily reachable mark. In my opinion the main reasons for the spread to exists are cross-border and micro-cap nature of the transaction coupled with relatively long time-frame (potentially up to 6 months).
YuMe also has three activist among it’s shareholders. Interestingly, in Sep 2016 one of them (AVI Management) offered to take the company private at $4.52-$5.22 per share and the other one (Edenbrook) right away objected to this arguing that the offered price significantly undervalues YuMe. Edenbrook’s valuation was as high as $8.5-$10.8. These discussions have not progressed since and now all parties seem to be willing to sell at $4.86 (+$1.03 dividend received in Jun 2017) and lock in the newly issued stock of RTHM at least for 6 months.
Downside
The share price run-up during August was likely the result of the rumors re takeover. When the acquisition price was revealed at the end of August YuMe share price crashed to the current levels. Thus assessing the unaffected Yume share price is a bit of a guess work – the company traded at $4.6 after dividend payout in June, then at $4.2 in the beginning of August and at $4.4 after Q2 earnings announcement. So in case the deal fails, the downside is probably somewhere between 0%-8%.
Other considerations and risks
- To lock in the current 6% spread 0.7325 shares of RTHM need to be shorted for each long share of YuMe. Exchange rate exposure can be eliminated by instantly converting the received GBP into USD. However, if the deal breaks the long/short trade would still be exposed to the exchange rate risk.
- Both companies will report Q3 (and potentially Q4) earnings before the expected closing time. This might affect YuMe shareholders’ willingness to tender or RTHM management to pursue with the transaction.
My IB shows borrow fee rate for RTHM is 10.53%.
Seems it went up yesterday. When I posted the borrow fee at IB was at 0.5%. With such a high borrow fee the trade is not worth the risk (unless one can find cheaper borrow with other brokers).
What happens if the pound depreciates significantly during the merger? Will the shareholders reject the case? Will RTHM re-consider the plan? It seems like the pound is in depreciating mode now.
Your guess is as good as mine, but I would not expect the changes in the exchange rate to be so drastic over the coming months that it would affect shareholders/company’s decision.
I thought there is exchange rate risk too. If the pound depreciates we won’t get $4.86. Why did you say the exchange rate risk can be eliminated?
What you get for each YuMe share does not depend on the exchange rate – fixed amount in USD plus shares in RTHM. If one hedges the position by shorting the to-be-received amount of RTHM and exchanges GBP from the short sale into USD right-away then there is no further GBP exposure left.
If the deal closes as expected then the received RTHM shares simply close out the short position.
What price of RTHM you use to get 4.86 payout?
Yesterday’s RTHM price of GBP3.22 and exchange rate of 1.338.
Spread has widened to 12% without any negative news with respect to merger.
RhythmOne continues on growth trajectory and integration of other acquisitions. In the recent earnings release it was announced that merger is on track with expected closing in Q1 2018:
https://www.sec.gov/Archives/edgar/data/1415624/000119312517311795/d448891d425.htm
Dt I am still having trouble locating the 3.22 price as my search indicates a price over 300. Can you link to proper quote? Second question are YUME shareholders receiving shares that are easily tradable in the us? Is this similar to orchestra trying to get approval to trade in us as part of the dest deal?
Thanks
Greg, in London stock exchange prices are indicated in pence (GBX) which is 0.01GBP. Current price of RTHM is 302GBX, which is 3.02GBP. Hope this clears it up.
I think Yume shareholders will simply receive the cash portion and shares in London listed RTHM. So far I have not seen any announcements indicating that RTHM would be seeking listing in US.
Thanks for the clarification, I am sure that was an elementary question but I did not realize. Do you not see the receipt of the shares in a London based security as a possible negative for US investors considering an investment in YUME and do you think that may explain any part of the spread? Again to compare to Dest, it seems to me Orchestra felt getting their shares approved to trade as a US ADR. (or the equivalent of an ADR) was a big deal, and a critical component to getting the deal done.
I do understand that most online brokers now you can sign up to trade foreign markets fairly easily so perhaps this is not a big of deal as I am making?
Thanks
Agree with you, that is clearly a negative and might have an effect on shareholder voting results. However, if that is the key reason why the spread exists, I am happy to take the opportunity as I do not see any issues in receiving UK listed stock for Yume shares. The same will be true for institutional investors.
Orchestra/DEST was a slightly different situation as Orchestra was traded in Paris and the stock was completely illiquid.
13D filling has been issued by Edenbrook, arguing that current deal undervalues Yume. Edenbrook owns 7% of shares and has been silent after the deal announcement (previous communication in May 2017). Probably this will not make much difference as larger shareholders have already agreed to merge with RTHM. Spread remains at 11%.
https://www.sec.gov/Archives/edgar/data/1415624/000091957417008407/d7750426_13d-a.htm
Yume started trading above the merger consideration.
At current prices merger consideration is 2.73*0.7325*1.35+1.7= $4.4/share, whereas Yume is trading at $4.59 – a negative spread of 4.5%.
So this YUME/RTHM arbitrage spread play has fully played out now. I did not have the position as RTHM borrow costs on IB increased to >10% forcing me to exit couple days after opening the trade.
I am not sure why the situation has inverted – potentially Yume shareholders are expecting a better offer following a second activist letter from Edenbrook or this is just random market fluctuations with microcap stocks.
RTHM borrow is still expensive (12%) and currently IB does not have any borrow availability.