Current Price – £0.204
Merger Consideration – £0.237
Upside – 16%
Expiration Date – 13th of September, 2018
This is one of those microcap merger arbitrage situations where large spread seems to exist without significant risks.
In June Pareteum (TEUM) agreed to acquire UK listed Artilium by offering 0.1016 Pareteum shares and £0.019 in cash for each share of Artilium – current spread stands at 16%. Shareholder meetings are scheduled for 13th and 14th of September. 60% of Artilium shareholders already entered into voting agreement, so it seems that Pareteum shareholder vote is the main risk here. Borrow is expensive (50%) but there seems to be plenty of availability on IB. I would expect the spread to close (or significantly narrow) after shareholders approve the deal. Accumulating material position is difficult due to low Artilium liquidity.
Both companies provide software services (SaaS) to mobile and fixed network operators. In Oct 2017 they formed strategic alliance and since then have cross-ownership in each other. This significantly reduces the risk of any of them walking out on the deal as companies have been cooperating already for a while and know each other well. So there should be minimal surprises down the road.
Like many other SaaS companies these two also trade at high revenue multiples (8x and 10x) while burning cash. Clearly not a typical value type investment and unhedged bets on the spread might not pay-off. If the spread does not close after the meetings it might take till mid October for new Pareteum shares to be distributed (see expected timeline). With unchanged borrowing costs the short leg of the trade would consume 1/3 of the spread (or 6%). There is a risk that timeline gets extended in which case borrow costs might consume the whole spread.
On Pareteum vote risk. Ownership is dispersed with majority of shares in the hands of retail investors. I would expect that management discussed this transaction with small number of institutional investors (and larger retail investors) and received ok from them. Most of retail investors will likely not be present in the meeting, but their broker non-votes would still count towards the quorum, which increases the likelihood that the vote will pass. As per proxy:
“Broker non-votes do not count for voting purposes, but are considered “present” at the meeting for purposes of determining whether a quorum exists.”
Downside here is quite hard to assess. Artilium traded at £0.17 (17% below current prices) before the announcement. However, in the same period Pareteum share price has also increased by a similar degree. So hedged trade might breakeven even if the deal is cancelled.