Newfoundland Capital Corp (NCC-A.TO) – Merger Arbitrage – 8% Upside

Current Price – C$13.65

Merger Consideration – C$14.75

Upside – 8%

Expiration Date – expected by Q4 2018

Acquisition announcement and Information Circular

This opportunity was shared by Michael.

 

Newfoundland Capital Corp (TSX:NCC-A) is the subject of a takeover offer from Stingray (TSX:RAY.A). For each NCC share, shareholders will receive between C$13.17 and C$13.28 in cash with the balance of the price to be paid in 0.15371 to 0.14294 of Stingray shares. This works out to c. C$14.5 per NCC share. Plus, NCC shareholders will receive dividends of C$0.25 semi- annually until close. There will be one at the end of summer that should get paid, and I suspect they’ll try to close prior to the December dividend to avoid paying it (so incentives to get the deal done faster). If they close in early December prior to paying the second dividend that is c. 8% spread in under 6 months.

With cash being the majority of the consideration, I think this is justifiable as an undhedged trade.

From a risk point of view, I think this is a relatively safe deal.

  • The Steele family owns over 80% of both classes of stock, so it will be approved by the seller.
  • On top of that Rob Steele (Chairman and CEO of NCC) is sitting on the board of Stingray.
  • The buyer has financing lined up (see details at the bottom of press release).
  • Share consideration is small, which reduces the risk of the buyer’s share price declining and eating all the spread.
  • The Steele family have a lock-up on their shares, which should also reduce selling pressure after the deal closes and allow small arbs a chance to sell.
  • As part of transaction financing $123m of new equity is being issued at $10.4 per Stingray share (vs current $8.9), so there should not be any further selling pressure at current prices.

I don’t think regulatory risks are significant here. Basically all that NCC owns is radio stations, and Stingray doesn’t own any at present, so antitrust shouldn’t be a concern. There are regulatory requirements to transfer radio licences in Canada (mostly payments to various groups) but they are well established and shouldn’t be a surprise.

In case the deal breaks, the downside should not be large either. NCC traded at similar levels before the announcement. Also when asked to identify the main reasons for the acquisition on the conference call (as any synergies are not fully evident) Stingray management noted that NCC is simply cheap cash-flow machine being acquired at 7.7xEBITDA with very low capex requirements (suggesting acquisition at c. 7.7x FCF) and great management team. Thus valuation at current prices is already low.

6 COMMENTS

  1. K.Simon

    Hi – Just checking, but since “all of the issued and outstanding shares” are to be purchased, you can buy over 100+ NCC.A shares? There’s no proration issue since it’s a full buyout merger. Thanks!

    1. dt

      Yes, this is merger arbitrage not a tender offer with odd lot provision.

  2. Thinley w

    How will the amount of cash and stock to be paid to shareholders be decided?

  3. dt

    As expected NCC shareholders have approved the transaction.

    Cash and stock will be determined based on this:

    “Assuming the Arrangement becomes effective, each Shareholder (other than a Dissenting Shareholder) will receive for each Share held: (i) the number of Stingray Shares obtained by dividing 3,887,945 by the number of Shares outstanding on the Effective Date; and (ii) cash in an amount equal to $14.75 less the product of (A) the Share Consideration and (B) $10.29. “

  4. dt

    The remaining spread has narrowed to 1% and I have exited the position. Merger is likely to close shortly and if it get’s delayed till Dec 2018, then NCC shareholders will receive another C$0.25 dividend. Overall a decent 7% return in three months.

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