Georgia Healthcare (GHG.L) – Squeeze Out – 10% Upside

Current Price: £0.675

Offer Price: £0.741 (in CGEO.L shares)

Upside: 10%

Expiration Date: 28th of August

Offer document

This idea was shared by Dan.

 

This is an interesting squeeze out situation in the UK that offers 10% profit in less than a month with very limited risk.  The idea might be available only for a short duration as the target company (GHG.L) might get delisted on the 5th of August. So far, the average volume for the last 7 days stands at £50k and £134k for the last two days.

The most likely explanation for the wide spread seems to be the administrative burden required to get the shares exchanged - after squeeze-out becomes effective (28th of August), the buyer will have to transfer the consideration to the target company. Then, in order to claim the payment, shareholders will have to go through a certain administrational process:

The consideration to which those remaining GHG Shareholders will be entitled will be held by GHG as trustee on behalf of those remaining GHG Shareholders who have not accepted the Offer and they will be required to claim their consideration by writing to GHG at the end of the six week period.

I am not exactly sure how difficult will it be to 'claim the consideration' - whether brokers will be able to do it on behalf beneficial owners or whether shareholders themselves will need to make the claim by mailing required documents (e.g. proof of share ownership) and some filled out forms. If someone on the board has experience with this in the UK, please share. Other than that, this seems to be a somewhat "risk-free" arbitrage.

Georgia Healthcare (ref. GHG - listed in London, UK) is getting acquired by its parent Georgia Capital (ref. CGEO - listed in London, UK) for a stock consideration of 1 CGEO for 5 GHG shares. Prior to the offer, CGEO already owned over 70% of the target company. The tender offer closed on the 16th of July with the buyer holding 97.4% of the target company's shares. Squeeze out procedure has already started (compulsory acquisition notices were despatched on the 17th of July) and the shares are expected to be exchanged on the 28th of August (6 weeks after the notice was despatched). According to UK law, the consideration paid for the minority shareholders must match the original offer.

The one caveat here is that in those 6 weeks until the 28th of August, minority shareholders can go to court and stall the squeeze-out until the judgment from the court is made. However, I believe this to be a minor risk (despite possible extensions in timing), because:

  • Although I haven't been able to find any practical examples of squeeze out transactions in the UK, it seems that the odds of the minority bringing the case to court are frail as "dissenting shareholders will require a compelling argument if they are to persuade a court that an offer accepted by 90 percent (or more) of the shareholders should not be upheld." So, given that CGEO already holds 97.4% and 90% of the minority has already tendered (CGEO owned 70% prior to the offer), it seems very likely that the court would rule in favor of the squeeze-out. The fact that 9 months ago CGEO has made another offer (see the timeline below) at a lower ratio of 1 CGEO for 5.22 GHG and would've received 92% ownership (which was scaled back with proration to retain liquidity of GHG) also seems to back up the argument somewhat.
  • CGEO intends to delist GHG, which will leave the minority shareholders in a liquidity limbo. 20 business days delisting notice was given on the 8th of July, so the delisting won't happen until the 5th of August. Nonetheless, future prospects of owning 2.6% of a delisted nano-cap company, should incentivize shareholders to accept the compulsory acquisition.
  • I haven't been able to find any statements/notices/news regarding the dissatisfaction of the offer from any GHG shareholders. If there were any intentions to challenge the case in court, I would expect shareholders to be more vocal about that.

 

Timeline

  • Nov'19-Dec'19. CGEO made a tender offer for GHG at 1 CGEO per each 5.22 GHG. There was no minimum condition and the offer was made without the takeover intentions. The eventual participation was such that if there was no proration, CGEO would end up with 92% (it already owned over 40% prior to the offer), so in order to keep the liquidity 44% of the participating shareholders were prorated and CGEO remained with 70% ownership.
  • 15th April. GHG and CGEO announced that they are in discussions regarding a possible all-share takeover offer priced at 1 CGEO for 5.22 shares of GHG - same exchange ratio offered in Nov'19.
  • 19th May. The final share exchange offer is announced with a sweetened consideration - 1 CGEO for 5 GHG. At the time CGEO held 70.63% of GHG.
  • 2nd July. The offer was declared unconditional as CGEO collected a combined 94% ownership, however, the acceptance deadline was extended to the 16th of July.
  • 17th July. The offer closed with CGEO owning 97.4% of GHG shares. Subsequently, the buyer has despatched the compulsory acquisition notices to the remaining minority shareholders. The squeeze-out is expected to become effective on the 28th of August.

 

Georgia Healthcare

The company is one of the largest healthcare services providers in Georgia. It operates in multiple segments: hospitals, clinics, pharmacy and distribution, medical insurance, and diagnostics.

 

Georgia Capital
CGEO is a Georgia-focused investment fund with $580m of portfolio value and diversification across multiple industries. Besides the stake in GHG, its only other public stake is 20% of shares in the Bank of Georgia (market cap = £380m).

 

7 COMMENTS

  1. Daniel

    Are you not just long GCAP for the 6 week period? i.e. you’re not receiving cash so it’s not a risk free arb

    1. dt

      There is borrow available for hedging, so that should eliminate the risk of price fluctuations if the borrow fees remain unchanged.

  2. Garry M

    Hi

    Thanks for this idea. I have one question – Is the offer price of £0.741locked in or could it change if the price of CGEO changes before the 28th of August?

    Regards

    Garry

    1. dt

      The situation is similar to all-stock merger arbitrage. Not the GBP value of the offer but rather the exchange ratio of shares is fixed. In this case, consideration will be paid out in CGEO.L shares and unhedged trades will be exposed to price fluctuations. However, at the moment there is borrow available for hedging.

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