US Cobalt (USCO.V) – Merger Arbitrage – 22% Upside

Current Price – C$0.96

Acquisition Price – C$1.17

Upside – 22%

Expiration Date – May 2018

Merger Announcement

This idea was shared by Vladimir.

 

Another opportunity in micro cap space in junior exploration companies.

First Cobalt Corp. (FCC.V) entered into a definitive agreement to acquire US Cobalt Inc. (USCO.V) for C$110m on March 13, 2018. Each US Cobalt share will be exchanged into 1.5 First Cobalt shares. Current spread stands at 22%.

Post-closing, existing First Cobalt and US Cobalt shareholders will own approximately 62.5% and 37.5% of the combined company respectively. In case of termination either party is liable to pay a termination fee of $5.5 million.

Basically, the strategy of First Cobalt is to acquire all players in NA region in the cobalt sector. In November 2017 First Cobalt acquired to companies in cobalt sector: Cobalt ONE and CobaltTech for its own shares. Additional info on transactions can be found here and here.

 

Merger Conditions

  • The transaction is subject to receiving customary approvals, which I don’t think will be hard to acquire, given that we are talking about US and Canada companies;
  • Approval of 2/3 of US Cobalt security holders – meeting will be held on the 17th of May (information circular here).
  • Approval of First Cobalt shareholders will only be necessary if ASX waiver is not received (anyway I don’t think it will be a problem)

The transaction has been unanimously approved by the Boards of Directors of First Cobalt and US Cobalt. The Board of Directors of US Cobalt recommends that its shareholders vote in favor of the transaction. First Cobalt has entered into the Management Voting Agreements with certain holders of US Cobalt Securities representing an aggregate of approximately 11.4%. The transaction is expected to close by May 28, 2018.

 

Key risks

While current spread represents a nice 20% premium, I couldn’t find a short availability in IB for First Cobalt. It is hard to judge whether 20% will be enough to compensate for unhedged position in the junior. After shareholder approvals of CobalTech and Cobalt One acquisitions as well as successful prospecting results, the share price of First Cobalt spiked to C$1.5 in November 2017, however since then it has gradually decreased to the current C$0.75/share.

USCobalt

5 COMMENTS

  1. Vincent

    I haven’t seen any news on the outcome of the shareholder vote yet, but looking at the share price I’m guessing it is approved?

  2. dt

    Interested to hear if this merger arbitrage worked out for unhedged positions – I did not participate myself.

    The last trading day of USCO was 1st of June, but merger was officially on 5th of June. So I assume newly issued First Cobalt shares were received after this date.

    First Cobalt shares dropped from C$0.77 on the 5th of June to C$0.6 today. So depending on when the new shares ewre received by previous USCO holders, this trade resulted either in 20% gain or 6% loss.

    1. over2u

      Hi dt, I have participated in this arbitrage, but exited way before actual conversion for return around 15% as in my view it was risky to wait for final conversion as it was highly likely that FCC price drop afterwards (what actually happened).

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