Current Price – $0.50
Expectect Payout – $0.60 – $0.70
Upside – 20%-30%
Expiration Date – Q1 2018
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).