Current Price: $1.05
Offer Price: $1.48
Upside: $450 (for odd-lots)
Expected Closing: late Q3 / early Q4
On the 10th of July network infrastructure services provider Westell Technologies announced intentions to conduct a 1 for 1000 reverse/forward stock split and delist from Nasdaq afterward. Both class A and class B fractional shareholders will get cashed out at $1.48/share, so the trade here is to buy 999 WSTL shares and get cashed out during reverse split for a total profit of $450. Shareholders' meeting to approve the transaction is expected to be held in September. Directors own 56% of the voting power (and 26% economic ownership), so the approval is guaranteed.
Despite the attractive upside, a couple of recent cases suggest this is far from being 'risk-free'. The main risks are that either the reverse/forward stock split or the terms get amended (price or the split ratio).
The primary purpose of such a transaction is to decrease the number of its shareholders below 300 (the level at which reporting to SEC is required), however, the transaction is very fresh and in the initial PR WSTL did not provide how many shareholders it currently expects to cash out. Proxy statement is likely to include additional information on this.
Examples of recent odd-lot cases with amended terms:
- PKD announced a similar reverse/forward split in September'19 at 64% premium. Eventually, the transaction became quite widespread and popular in the media (other blogs, Seeking Alpha, etc.), and the number of new arbitrageurs jumping in exploded (volume stood at 20x to pre-announcement levels). Therefore, in October'19 the company has amended the terms from a fixed ratio of 1 for 100 to a range going from 1 for 5 to 1 for 100 (management would choose the exact at the time of closing). Given the situation, it appeared very likely that the final ratio will stand close to the lower limit, so many arbitrageurs were forced to decrease their position from 99 shares to 4 shares at a loss. Interestingly, it seems that eventually, so many odd-lot accounts dumped the trade that the final ratio was selected at 1 for 50.
- BLBD is another example - this was a tender offer will odd-lot provision announced in Sept'18 at an 8% premium to pre-announcement price. The transaction also received significant attention on SeekingAlpha and on other platforms and eventually, the management chose to eliminate the odd-lot provision. The stock dropped below the pre-announcement price. The offer ended up being oversubscribed by 12x (6.6% proration). After closing, shares fell down significantly in the following two weeks. Instead of risk-free $200 odd-lot speculators lost around $300-$600.
- A successful recent case of a similar reverse/forward split is Dynasil. Transaction was announced on May'19 with only a 6% premium to pre-announcement price or $480 profit for odd-lots (the split ratio was 1 for 8000). The offer went relatively unnoticed by the investing media and closed in August'19 costing the company $2.2m (not including the transaction fees) - so the amount of odd-lot accounts (calculating at the maximum amount of odd-lot shares - 7999) was standing at about 275. Still, despite a relatively low premium and the fact that most of the time DYSL traded very close to the offer price and low attention from media, the number of shares expected to be cashed out increased 2x from the levels (from 1.4m to 2.8m) indicated in the initial announcement (until final proxy).
Further notes on Westell Technologies
WSTL is essentially a "melting ice cube" company that is facing significant issues with scale and competition. It operates in 3 segments:
- In-building: enables cellular networks in stadiums, arenas, malls, buildings, and other indoor areas.
- In site management: provides machine to machine systems to monitor site infrastructure and support systems.
- Communications network solutions: provides integrated cabinets, power distribution products, copper and fiber network products, etc.
As of Mar'20 the company had no debt and held $20m in cash.
Recently the company received delisting notice from NASDAQ (due to share price being lower than $1/share) and has until Dec'20 to regain compliance (however, apparently decided to delist voluntarily anyways).