Current Price – A$0.705
Merger Consideration – A$0.85
Upside – 20%
Expiration Date –August/September 2018
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”