Rosetta Genomics (ROSG) – Microcap Merger Arbitrage – 20% – 30% Upside

Current Price – $0.50

Expectect Payout – $0.60 – $0.70

Upside – 20%-30%

Expiration Date – Q1 2018

Merger Announcement

 

This write-up was shared by Gianluca, however couple other members also suggested ROSG arbitrage.

On 15th of December Rosetta Genomics (NASDAQ: ROSG), a leading oncology diagnostic laboratory, agreed to be acquired by Genoptix Inc., a private company specializing in hematology and solid tumors. The total consideration is $10 million in cash. The final price per share is subject to some uncertainty but is estimated to fall between $0.60 and $0.70 per share.

After filing a proxy statement with the SEC, the spread narrowed to 1%, reaching an intraday high of $0.60 more than once. The market seemed to think the deal was almost certain to close, and with some probability at a price per share higher than the lower estimate provided by management. There is no regulatory risk and management was clear in the announcement that selling was the only option to avoid bankruptcy since ROSG is lacking liquidity and with a stock price down 90% in a year also financing is out of the way: so, the only rational choice for shareholders was voting for the merger and recoup at least some pennies on their initial investment.

Nonetheless, the shareholder meeting on the 1st of February was a big surprise: it had to be adjourned to the 15th of February because the quorum was not reached. On this piece of news the stock price tumbled down to an all-time low of $0.42 but then settled at the current price of $0.50.

With a float of just 1.87 million shares and a 16.87% institutional ownership, I think this was due more to retail shareholders not being timely informed or just ignoring the proxy solicitation than to some form of retaliation (no activist shareholder at the horizon). So, to me the probability of a final favorable vote is still high.

Assuming a closing price in the mid of the estimated range the upside is really fat: +30%! Moreover the time horizon is extremely short: if on the 15th of February the merger is voted for, the price will certainly jump back close to $0.6 (this is a whopping 20% in 4 days!), but in that case I think I will wait for the merger to be completed, which will not take too long (this is the only needed approval and ROSG is short on cash), hoping to scrape some more pennies if the closing price is higher than $0.6.

Of course, if the merger is not approved the stock price can do anything. The worst scenario is the one pictured by management: bankruptcy. In that case the return will be a dismal -100%. Honestly, I think this is a very unlikely possibility. I think a more reasonable estimate of the “busted M&A” scenario is something like $0.40, the price the stock hovered around when the first meeting was adjourned.

So, with these numbers in mind, and using a closing price of $0.65, the implied success probability of the merger turns out to be a thin 40%: to me this number looks way too small, but even assuming – agnostically – a 50% chance of success the Expected Value of this “bet” is +5% (in less than a month).

22 COMMENTS

  1. dt

    Thanks for write-up. Would you mind shedding some more light on:
    - what is the main driver between $0.6 and $0.7 buyout prices and what is your expectation on the eventual price?
    - Management clearly does not believe it has sufficient votes. If majority holders are indeed retail investors, do you think there will be sufficient votes for quorum requirements (if there is any)? How are the broker non-votes counted?

  2. Alex1511

    I like the case. However I still don’t understand why the meeting really had to be adjourned. Retail shareholder certainly think Management did a poor job. They could not even negotiate a fixed price.

  3. Fernando

    A thesis that relies on retail shareholders being rational, doesn’t seem robust to me

  4. Fernando

    From glancing around the merger document, it certaintly didnt seem like more $0.60 was all that likely

  5. greg lia

    If my math is correct 3 or 4 percent of the float changes hands every day. Dec 27 is a long time ago. Vast amounts of the stock now owned by those not eligible to vote. Reaching out and asking those who no longer own the stock to vote, while completely above board, seems desperate. Perplexed by the high percentage of against votes. Ton of yes votes needed in the additional week prior to feb 22. I’m sitting this one out. Good luck to all

  6. dt

    Voting record date is ridiculous. I am wondering if this record date was set due to some requirement in the Israel laws or what is chosen arbitrary by the company?

    If this is a legit merger (which both ROSG management as well as Genoptix want to close) then what stops them from changing this record date and launching a new vote? Even if that would mean signing of a new merger agreement, such technically should not be a deal breaker.

    Keeping in mind that ROSG has received $1.8m of bridge loan from Genoptix, and that ROSG would face bankruptcy in the absence of merger, it seems that both parties should be interested in the positive outcome of this merger.

    On the other hand, Genoptix might not be as interested in closing the merger – if ROSG defaults on the bridge loan then Genoptix would take over all ROSG assets.

  7. Fernando

    “If this is a legit merger (which both ROSG management as well as Genoptix want to close) then what stops them from changing this record date and launching a new vote? Even if that would mean signing of a new merger agreement, such technically should not be a deal breaker.”

    Yeah, this seems their only way they will be saved.

    “On the other hand, Genoptix might not be as interested in closing the merger – if ROSG defaults on the bridge loan then Genoptix would take over all ROSG assets.” Absolutely

    We should be asking is whether ROSG is a SHORT, clearly its not a long

  8. Joe Hill

    Interesting we haven’t heard anything yet. Wonder if the vote got pushed again.

      1. Joe Hill

        Wow. You guys know more about this than me. But shouldn’t someone be yelling at Cantor Fitzgerald? I see them listed as financial advisor to ROSG in the December 15 press release announcing the transaction. Seems like a bust on Cantor for structuring the docs the way they did.

  9. dt

    Company lacked only 3% of quorum to pass the merger and now it will end up paying $750k termination fee for Genoptix. So far there is no indication how much was borrowed under the Genoptix bridge loan (assume more than $1m) and this bridge loan will be payable in 45 days after termination of agreement. Bridge loan was secured by all the assets of ROSG. So close to $2m will be due shortly and ROSG clearly has no money to pay it. Thus default on these payments is lurking in the absence of another transaction.

    So, I am wondering, can investors expect another offer from Genoptix? It seems that it would be cheaper for Genoptix just to get the assets after the company defaults and forget about public equity holdings.

    Any other thoughts?

    The strangest thing is that this story would have ended completely differently if management managed to get additional 3% of shareholders to the quorum (even if these voted against the merger).

    1. dt

      It is back, but at much lower price – $0.4-$0.45 share. Currently spread stands at 9.6%.
      I assume this time there should be far less struggle to collect shareholder votes – record date set for 9th of March and shareholders have already seen what happens to shares if the vote is not approved.
      But the whole situation is still a bit bizarre – I do not understand why Genoptix is wasting money to buy out public shareholders and why it cannot simply take over all of ROSG assets after default.

  10. greg lia

    They also have lowered the quorum percentage to 25% have they not? This and the change to March 9 should make vote a slam dunk. Having said that, the breakup fee was so large certainly would have been nail in the coffin, so i too am a bit confused why Genoptix is pursuing a revised offer.

    Tempting with the updated and revised provisions though.

      1. FM W

        Any update on this? 27th of May has passed but I didn’t see any press release or sec filings regarding this matter.

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