Quick Pitch: ROK Resources (ROK:V)

Merger Arbitrage: 20%+ Upside (at C$0.20)

I’ve received several questions about this situation, so decided to add a brief about it note on SSI. It’s a risky setup, and in my view, the wide spread appropriately reflects those risks. However, it may still be of interest to some of the braver merger arb enthusiasts. Liquidity is limited on this one.

ROK Resources is a tiny Canadian oil & gas producer that also owns a 16.5% stake in a junior lithium explorer EMP Metals (listed in Canada, with ticker EMPS:CN). The company is about to be acquired by Blue Alaska Oil Trading under a structure that splits the assets. Blue Alaska will acquire ROK’s O&G business for C$52m in cash, while the EMP Metals stake will be carved out into a new private SpinCo. ROK’s shareholders will receive the cash distribution of sale proceeds (C$0.2361/share) and shares in the SpinCo.

I do not see much value in the SpinCo, but even if we fully ignore the stake in EMP Metals, ROK currently trades at a 20% spread to the cash component of the merger consideration.

All merger conditions have been satisfied, and the deal was expected to close by the end of last year. Instead, on December 31 ROK unexpectedly announced that closing had been delayed because the buyer failed to transfer the cash payment for the O&G assets. No further explanation was provided, but the parties agreed to extend the Outside Date (after which either side can terminate the transaction) to March 17. Following this announcement the spread widened to the current levels.

So the entire bet now comes down to whether the buyer ultimately secures the cash and closes the buyout. The proxy does not elaborate on how Blue Alaska plans to fund the buyout. But there are a few arguments in favor of successful closing:

• Blue Alaska Oil Trading is a vehicle controlled by Michael Bobrov. He is a controversial figure, but appears to have both capital and connections. Bobrov is the CEO and a major shareholder of Bazan Group, which operates Israel’s largest refinery. A couple of years ago, he was also involved in the acquisition of Europe’s third-largest refinery from Russia’s Lukoil. While that transaction was structured as if Bobrov was the buyer, it later emerged that most of the funding was provided by the notorious shipping billionaire George Economou. Convicted Israeli billionaire Barry Steinmetz was also involved.
• Bobrov previously viewed ROK’s acquisition as an entry into the Canadian oil sector and indicated some commitment. ROK’s CEO said in an interview that the buyer was “looking at getting into Canadian oil space for a while” and wanted to “grow quite quickly.”
• The buyer has already deposited C$3m, which would be forfeited if he was to walk away.
• ROK has not terminated the merger outright and has agreed to grant additional time, which suggests management still sees a path to getting the deal done.

The stock is already trading back at pre-announcement levels, yet if the takeover ultimately fails, it could still move lower, as the recent Q3 earnings were weak and oil prices have declined a bit since the merger was announced. The potential downside is probably not going to be massive, but a break price in the C$0.15–$0.17 range seems possible.

Also worth noting that cash consideration per share might be subject to adjustments: the C$52m payment would be lowered if ROK’s transaction expenses exceed C$4.25m, which management has previously said is unlikely. There could potentially be other adjustments as well, but the proxy is fairly vague on the details.

 

EMP Metals stake – only a free option, not more

At current prices, the EMP Metals stake is worth C$0.055 per ROK share, bringing total merger consideration to C$0.2911/share and the spread to 45%.

However, there are a few wrinkles:

• SpinCo will be a private entity for holding EMP Metals shares. Shareholders will realize value only if SpinCos management successfully monetizes the stake and distributes proceeds to shareholders.
• Management does intend to monetize the stake and distribute the proceeds, but for some reason this hasn’t been outlined in the proxy and is mentioned only in this interview.
• EMP shares held by SpinCo will be subject to a lock-up, with 50% unlocking in September 2026 and the remaining 50% in September 2027. SpinCo will not be able to dispose of these shares earlier. As ROK’s CEO put it:

In a perfect world, we would distribute out those shares, those public shares in EMP, to shareholders. But because of the share exchange agreement and the escrow provisions, this isn’t feasible. We have to just hold those until such time of a monetization event or the escrow period terminates or expires. And that’s our hope. But again, if not, a year from now, we’ll be able to monetize half and then, two years from now, the remaining half. So we’re planning for a life cycle of two years, on the SpinCo.

• EMP Metals trading liquidity is even more limited than ROK’s, so market prices might not reflect the actual value and selling the stake in the open market will not be possible.
• It is also unclear how the SpinCo’s operating expenses will be funded in the interim, so even if the stake is eventually monetized after lock-ups expire, shareholders might end up with far lower figure

So I do not think there is much value in the SpinCo for minority shareholders. At best, it is a free option on top of the cash consideration.