Mitula Group (MUA.AX) – Merger Arbitrage with Odd Lot – 20% Upside

Current Price – A$0.705

Merger Consideration - A$0.85

Upside – 20%

Expiration Date –August/September 2018

Announcement and presentation

This idea was shared by Daniel.

 

In May ASX listed Mitula Group (MUA.AX) announced that the board had received (and was unanimously recommending) a takeover offer from TSE listed group, LIFULL Co (TSE:2120). Mitula is a logical acquisition for LIFULL given they acquired its main competitor, Trovit, in 2014. Combining the groups will create one of the largest online classifieds firms with over 170 million visits per month.

What caught my attention at first was the juicy spread between the takeover price of AUD$0.85 and Mitual’s current share price of ~AUD$0.705 (and 20% merger spread is almost unheard of these days unless a potential regulatory or competition hurdle exists – which I don’t believe should be the case here).

So the obvious question that follows is, why does such a seemingly lucrative opportunity exist?

For starters, it’s a complex deal structure that will involve Aussie investors receiving stock in Tokyo listed security. The AUD$0.85 takeover price is comprised of 0.0753 LIFULL shares for every one they hold in MUA – there is a “share exchange ratio adjustment mechanism” that protects the downside for MUA shareholder up to 10.7% (see slide 10 for clarification), however, you will essentially be “long” LIFULL stock for the duration of the trade. I can’t find any options over LIFULL’s stock and given it is a relatively small company (~AUD$1bn market cap) it would likely be difficult finding stock to borrow and go short.

So, why am I still interested?

Well, another quirk of this deal is that shareholders can elect to receive AUD$0.80 in cash for their first 20,000 shares. This unique feature is a key reason why I think the opportunity to make a low risk 13% exists – institutional investors cannot bid the arbitrage away. From the point of view of an Australia institutional investor, or any shareholder with greater than 20k shares, they can either:

  • Await around and see if the takeover goes ahead, taking on currency and price risk in the interim, to then be stuck holding a position in a foreign listed investment – which many mandates will prevent and many private investors won’t want to deal with (to obtain the TSE listed shares one needs to open a securities account in accordance with the book-entry transfer system in Japan)
  • Sell down their holding to 20k and wait for the deal to close and receive their $0.80 per share – which is equal to “2 fifths of stuff all” for an institutional investor who is likely managing tens, if not hundreds of millions of dollars.

Therefore, retail investors have an opportunity to take advantage of forced selling and should be able to extract AUD$1,900 (per account) from the market in exchange for very little risk.

Risks are that it gets voted down by the Lifull shareholders at the special meeting to approve the share issuance. I think this is a low risk given insiders control nearly half of the company and have stated on record their support for the deal. No regulator push back was mentioned by the management team when asked directly. Also, downside might not be as significant as one might think just by looking at the share price change from unaffected levels – the stock was only trading at that level because of a poorly announced earnings downgrade last year and the hyper myopic nature of Australian small cap investors. MUA is a very stable, high quality company and at 72c I believe it is trading for a little less than 10x EV/EBITDA (where EBITDA converts directly to pre tax free cash flow) – therefore, not a high multiple.

The expected implementation date is late August (or potentially September) indicating a holding period of less than 5 months and implying an IRR in excess of 25%.

Note: There might also be a way to receive the full AUD$0.85 per share, without opening a Japanese securities account, however, it still does not get around the interim currency and price risk:

“The number of the Company common shares that can be received as consideration by the Stock-receiving Mitula Shareholders who do not notify the Company of their securities account information or their intention to hold the shares in the Pooled Account A within the prescribed period will continue to be kept in the Pooled Account B after the Settlement Completion Date. In such a case, if any valid notifications will not additionally be made to the Company within the prescribed period in the prescribed way, these shares in the Pooled Account B will be sold in accordance with the sales policy prescribed in the Scheme Booklet and then the sales proceeds will be paid to such shareholders in cash after deducting costs”

19 COMMENTS

  1. dt

    It might be necessary to become shareholder of record in order to quality for the odd lot provision and apply for the cash portion of the distributions (not relevant for the overall merger consideration).

    This was the case with Virgin Australia:
    https://www.specialsituationinvestments.com/2018/02/virgin-australia-vah-asx-odd-lot-buyback-a80-risk-free-upside/

    Merger document is quite vague regarding this:
    “Generally, any Mitula shareholder listed in the final shareholder register (the “Final Mitula Shareholder(s)”) on the record date when the Mitula shareholders entitled to receive the consideration for the scheme of arrangement will be determined (the “Final Mitula Shareholder Record Date”) will receive the Cash Consideration for the Mitula Shares owned by the shareholder (but only 20,000 shares if the shareholder owns over 20,000 Mitula Shares, in that case such shareholder will receive the Stock Consideration for the balance).”

    I am guessing that only record shareholders will be on the final shareholders register. I have reached out to the company regarding this and will update if any info is received.

  2. makarid makarid

    Thank you for this excellent idea.If we can tender from IB this idea will be lucrative.I will talk with my broker also.Thanks again.

  3. Michael Lax

    Which brokers allow you to request shares to be recorded in your name for a reasonable fee?

  4. M

    I’ve been watching this for awhile.

    The reason the spread is huge is because LiFULL shares have tanked 32% since this deal was announced (downside protection is only for the first 10% or so). Even with the downside protection the exchange ratio implies MUA is valued at $0.65 before adjusting for time value or money and deal risk. If anything I’m surprised MUA isn’t lower.

    Hypothetically, this is a wonderful opportunity for retail shareholders to make a good return on the first 20,000 shares they held on record assuming they tender for $0.80 cash. Please remember to use an Australian broker that holds shares NOT as a custodian so likely CBA, WBC, ANZ or NAB brokerage accounts are the bigger local banks that might work.

    Back to the issue at hand. Clearly the Japanese shareholders HATE this deal given the market reaction with their shares down 30%+ and adding fuel to the fire the scrip merger aspect means even with the first 10% downside protected larger MUA shareholders will get A$0.65 not A$0.85 on current prices. These two parties are key in getting the vote to succeed so I think it’s a higher risk than you have outlined.

    This transaction is a long time away with a scheme booklet to be drafted and released then the customary voting periods. I’ll watch closely in the months ahead but won’t be buying any stock until the picture becomes clearer.

    It’s potentially a winning idea but still a huge amount of risk involved given what has happened since the transaction was announced. Thanks for sharing I was going to post this once it was a little more progressed.

    What do others think?

    1. dt

      M, how do you arrive at A$0.65?

      My calculations:
      Lifull share price 752JPY = A$8.97
      Conversion ratio cap = 0.08436 (number of Lifull shares for each share of MUA)
      Consideration per MUA share = A$8.97 * 0.084336 = A$0.75

      Conversion ratio from here:
      “If the Company Share Valuation for Allotment Ratio Adjustment is less than the Initial Company Share Valuation of AUD 11.29, the Allotment Ratio will be adjusted up to the number calculated using the formula but only up to 0.084336.”

      And the formula is A$0.85 / A$8.97 (current Lifull price in A$) = 0.094

    2. M

      $0.65 should be $0.75* typo on my phone. Sorry for any confusion. Comments on risk and waiting to see how this progresses stand.

  5. work 22

    Spread narrowed significantly with the fall in LIFULL stock in Japan. Not sure what is going on, no real news. Borrow has been there all along. MUA AU holders didn’t chase the stock up, but that also mean they didn’t panic and sell it down as LIFULL stock came off. Rare.

    On the 20k odd lot for 80 cents, seems like a difficult thing for non-Australian registered holders. Might have to play for the overall arbitrage.

  6. Aidan Rich

    Anyone in Australia know whether Comsec or CMC Stockbroking will be able to handle this purchase (including the corporate actions process)? I’ve only used IB for corporate actions before, and was burnt with the Virgin Australia offer not being processed on IB.
    thanks

    1. Ralf Eckey

      Aidan, did you get to the bottom of this? Surprised IB won’t process Australian corporate actions. I’m positioned through IB accordingly, and would appreciate you sharing anything you learn about other brokers supporting the corporate actions process for this deal. I could still transfer the stock, given that there is plenty of time before the deal finalises.

      1. Aidan Rich

        Hi Ralf
        I didn’t follow up any further with IB on this. Will probably purchase with Comsec or CMC instead

  7. Vincent

    I asked Australian broker ANZ if I can open an account and also about the shareholder registration. I got this reply:

    “For international clients, customers are welcome to open up an ANZ Share Investing Account provided they have an Australian Bank Account. Regarding your CHESS enquiry, we are the sponsoring broker on behalf of ASX (CHESS). The shares are held within your individual HIN and hence the shares you purchase with us are held under your personal name. Regarding corporate actions, it is dependent on the Share Registry and you will need to contact the appropriate Share Registry to see if you are eligible for the cash distribution.”

  8. dt

    The spread on the hedged trade has virtually been eliminated. Value of Lifull shares to be received is A$0.732 and price of MUA stock stands at A$0.725.

    The deal is still subject to Mitula shareholder vote and if approved should be implemented in early September. I am not sure if there is any hope for MUA shareholder to expect a better offer arguing that Lifull share price has declined 25% since the announcement of the offer.

    Odd lot holders of record still stand to gain A$0.8/share in cash.

  9. Andrew Davis

    This deal is still subject to approval by Mitula shareholders. Does anyone know when the vote is likely to be? Must be soon? But I haven’t heard anything & can’t find anything on the company website or ASX…

    1. Ralf Eckey

      Vote is scheduled for October. IB assumes it will occur on the 10th…but that is unconfirmed for now.

      Andrew, are you in Australia? Which broker are you using for this?

      1. Andrew Davis

        Hi Ralf, Thanks very much. I reached out to Mitula IR and they weren’t particularly helpful. I am based in New Zealand. I am with IB. But I will do an off-market transfer of this holding from IB into my personal name beforehand (I’ve never done this before, so am planning to allow up to 2 weeks).

  10. M

    Some important updates in recent weeks/days on this deal. In summary it’s looking like it has been delayed a few months and they are hoping the buyers share price improves to make the exchange ratio more attractive. More importantly unless you already own 19,999 shares or less as of 22nd October 2018 you will not be eligible for the $0.80 cash consideration. Similar to the Blue Bird odd lot disaster the “free lunches” are becoming more difficult to predict.

  11. dt

    A number of positive developments for Mitula shareholders:

    – Share price of Lifull has been rallying over the past month.
    – Merger consideration will depend on Lifull VWAP from 26th of November till 7th of December.
    – There is plenty of cheap Lifull borrow available on IB for hedging;
    – Lifull agreed to add further downside protection with cash top up with per share consideration ends up below A$0.8 (up to maximum of A$10m).
    – Lifull shareholder meeting has been set for 10th of Dec and owner of 35% of the stock has agreed to vote in favor of the merger.
    – Mitula shareholder meeting will take place the next day on the 11th of Dec.

    https://www.mitulagroup.com/sites/default/files/report-presentations/2018-11/20%3A11%3A2018%20-%20Scheme%20Update%20-%20LIFULL%20Adds%20Additional%20Downside%20Protection.pdf

    http://news2.paritech.com/comnews/20181026/02039624.pdf

  12. Aidan

    last day of trading for MUA today
    Will be a good trade with 20,000 shares brought at 0.627 and sold at 0.80 for $3460 AUD (27.5%) return over about 5 months.

  13. work 22

    good call. managed to trade around it twice. Lifull really made the effort to close this deal :)

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