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).
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.
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.