Merger Arbitrage Mondays - Chicken Soup For The Soul Acquires Redbox At a Massive Discount

Most M&A observers had expected U.S. deal activity to moderate or drop sharply this year but it feels like things are heating up with large acquisitions like Microsoft's acquisition of Activision Blizzard (ATVI) or Elon Musk's acquisition of Twitter (TWTR). More than half of the 45 deals announced since the start of the year have been bigger than a billion dollars in size and 13 deals were larger than $10 billion. Aggregate total deals announced this year are now approaching $300 billion. Maybe this is the last hurrah before the tide goes out. Merger activity increased significantly last week with eight new deals announced and two deals completed. Three of the eight new deals announced last week were potential deals in the works.

Redbox Entertainment RDBX

An interesting deal announced last week was the acquisition of Redbox Entertainment by Chicken Soup for the Soul Entertainment (CSSE). In over a decade of tracking Merger Arbitrage deals, we have never come across a 'take under' at such a massive discount. Redbox was trading at $5.60 before the deal was announced. Under the terms of the agreement, Chicken Soup will acquire Redbox in an all stock deal at a fixed exchange ratio of 0.087 of a share of class A common stock of Chicken Soup per Redbox share, representing a discount of 82%. Based on CSSE's current price of $5.48, the deal price works out to less than 48 cents per share of Redbox. I read the merger agreement twice to make sure I was not missing something. The 0.087 per share exchange ratio does not appear to be a typo.

Redbox Entertainment, a video rental company known for its bright red kiosks is another victim of digital media and distribution. The company went public in October 2021 through a SPAC merger with Seaport Global Acquisition. The company posted a string of losses after going public and Redbox's post-SPAC shares declined from $10 to below $2 recently, as you can see from the chart below. Operating losses and a growing debt load probably left the company with few options but to accept this take under offer from CSSE.

Redbox 1 Year Price Chart (source: Inside Arbitrage)

Twitter (TWTR)

The fiasco at Redbox pales in comparison with what is going on with the acquisition of Twitter. Following Elon Musk's tweet last week, stating that the Twitter deal is temporarily on hold, Twitter shares fell as low as $40.01 on Friday, May 13 before recovering a little to close at $40.72. At Friday's closing price, the spread on the deal expanded to 33.10% or 52.52% annualized if the deal closes by the end of the year. We wrote last month that the $54.20 price Musk was offering was fair for the company. I've been a Twitter shareholder for several years but the spread on the deal did not convince me to add more to my position. Musk, responding to his tweet about putting the deal on hold, mentioned that he is still committed to the acquisition.

This sudden interest in doing further due diligence about the number of bots on Twitter is surprising considering Elon had on many occasions openly talked about 'fixing the bots'. Tesla's stock has been under pressure and is down 23% since the deal was announced. If the stock were to fall further, it could impact the margin loan portion of the financing for Twitter and the banks might require Elon to post more collateral. This latest twist could be a ploy to get Twitter's Board of Directors back to the negotiating table and accept a lower offer the way Bernard Arnault, LVMH’s billionaire CEO, managed to negotiate the Tiffany's deal down from $135 per share to $131.50 per share (a $400 million discount). LVMH had attempted to walk away from that deal citing the pandemic's impact on Tiffany's sales but Tiffany sued LVMH to compel them to complete the merger. I certainly hope that Twitter's Board of Directors does not cave into pressure to negotiate the deal lower. Walking away from this deal is going to be very difficult for Elon and Twitter could sue him to make him perform.

You can find all the active deals listed below in our Merger Arbitrage Tool (MAT) that automatically updates itself during market hours.

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Deals In The Works

There were five new deals announced in the Deals in the Works section last week.

SPAC Arbitrage

There were four new SPAC IPOs filed and two new SPAC combinations announced last week. You can find the new SPAC IPO announcements in our SPACs tool here.

• On May 9, 2022, Grindr entered into a definitive agreement to merge with Tiga Acquisition (TINV).
• On May 10, 2022, ProSomnus Holdings, a company that develops medical devices for the treatment of obstructive sleep apnea, and Lakeshore Acquisition I Corp (LAAA) entered into a definitive business combination agreement.
• On May 11, 2022, Getaround and InterPrivate II Acquisition Corp. (IPVA) entered into a definitive business combination agreement that will result in Getaround becoming a public company upon completion of the transaction.
• On May 12, 2022, Amprius Technologies and Kensington Capital Acquisition Corp. IV (KCAC) announced a definitive agreement for a business combination that would result in Amprius becoming a publicly-listed company.

Weekly Spread Changes:

The table below shows weekly spread changes between May 7 and May 13, 2022.

Symbol Quote Acquiring Company Acquiring Company Quote Current Spread Last Week Spread Spread Change Weekly Deal Type TWTR 40.72 Elon Musk (N/A)   33.10% 8.84% 24.26% All Cash CDR 25.23 Wheeler Real Estate Investment Trust, Inc. (WHLR) 2.045 14.94% 2.95% 11.99% All Cash SJR 26.86 Rogers Communications Inc. (RCI) 49.77 20.63% 11.11% 9.52% Special Conditions MGI 9.42 Madison Dearborn Partners, LLC (N/A)   16.77% 9.89% 6.88% All Cash SAVE 16.98 Frontier Group Holdings, Inc. (ULCC) 8.72 10.76% 4.00% 6.76% Cash Plus Stock NP 39.03 Schweitzer-Mauduit International, Inc. (SWM) 26.49 -7.83% -5.77% -2.06% All Stock MILE 0.9996 Lemonade (LMND) 21.04 10.71% 14.06% -3.35% All Stock HTA 29.15 Healthcare Realty Trust Incorporated (HR) 28.56 14.51% 19.40% -4.89% Cash Plus Stock EMCF 35.7 Farmers National Banc Corp. (FMNB) 14.77 -11.05% -6.14% -4.91% All Stock TEN 16.63 Apollo Global Management, Inc. (APO) 54.2 20.26% 27.63% -7.37% All Cash

Deal Statistics:

Total Number of Deals Closed in 2022 68 Total Number of Deals Not Completed in 2022 4 Total Number of Pending Deals Cash Deals 56 Stock Deals 11 Stock & Cash Deals 10 Special Conditions 9 Total Number of Pending Deals 86 Aggregate Deal Consideration $841.16 billion

New Deals:

• The acquisition of ServiceSource International (SREV) by Concentrix Corporation (CNXC) for $164.49 million or $1.50 per share in cash.
• The acquisition of Hemisphere Media Group (HMTV) by a subsidiary of Gato Investments for $658.07 million or $7.00 per share in cash. We added HMTV as a potential deal to the Deals in the Works section on July 22, 2021,  and the price after the news of the potential deal came out was $12.78.
• The acquisition of Points.com (PCOM) by Plusgrade Parent for $385 million or $25.00 per share in cash.
• The acquisition of Hailiang Education Group (HLG) by Hailiang Education International Limited for $368.89 million or $14.31 in cash without interest (the "Per ADS Merger Consideration"). We added HLG as a potential deal to the Deals in the Works section on December 23, 2021,  and the price after the news of the potential deal came out was $12.21.
• The acquisition of Biohaven Pharmaceutical Holding Company (BHVN) by Pfizer (PFE) for $11.6 billion. Under the terms of the agreement, Pfizer will acquire all outstanding shares of Biohaven not already owned by Pfizer for $148.50 per share in cash. Biohaven common shareholders, including Pfizer, will also receive 0.5 of a share of New Biohaven, a new publicly traded company that will retain Biohaven’s non-CGRP development stage pipeline compounds, per Biohaven common share. We wrote about this deal in more detail in our May 2022 Mid-Month update for premium subscribers.
• The acquisition of Switch (SWCH) by DigitalBridge Group (DBRG) for $11 billion or $34.25 per share in cash. We added SWCH as a potential deal to the Deals in the Works section on March 21, 2022,  and the price after the news of the potential deal came out was $29.43.
• The acquisition of Trecora Resources (TREC) by an affiliate of Balmoral Funds for $247 million or $9.81 per share in cash.
• The acquisition of Redbox Entertainment (RDBX) by Chicken Soup for the Soul Entertainment (CSSE) for $182.9 million in an all stock deal. Under the terms of the agreement, Redbox stockholders will receive a fixed exchange ratio of 0.087 of a share of class A common stock of Chicken Soup for the Soul Entertainment per Redbox share.

Deal Updates:

• On May 9, 2022, The U.S. Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) with respect to the merger between Intersect ENT (XENT) and Medtronic (MDT). With early termination granted under the HSR Act, the transaction has now received all applicable antitrust regulatory approvals.
• On May 9, 2022, Terminix Global Holdings (TMX) announced it has entered into a definitive agreement to divest its pest management businesses in the U.K. and Norway. These businesses are being divested by Terminix as a condition to the closing of its pending merger with Rentokil Initial (RTOKY).
• May 10, 2022: Tenneco's (TEN) sale to Apollo Global (APO) has been filed under "simplified procedure" for China's antitrust review.
• On May 10, 2022, Oracle (ORCL) extended the expiration of the offer with respect to its merger with Cerner Corporation (CERN). The offer was previously scheduled to expire on May 11, 2022. The expiration date of the offer has been extended to June 6, 2022.
• On May 10, 2022, shareholders of South Jersey Industries (SJI) approved the company’s merger with Infrastructure Investments Fund at a special meeting of shareholders.
• On May 11, 2022,  TEGNA (TGNA) and Standard General received a request for additional information and documentary material from the DOJ in connection with the DOJ’s review of the transaction.
• May 12, 2022: According to Reuters, Twitter (TWTR) CEO Parag Agrawal told his employees in a memo, that two senior Twitter leaders who oversee the consumer and revenue divisions will depart the social media company.
• On May 13, 2022, Nielsen Holdings (NLSN) announced the expiration of the 45-day "go-shop" period under its previously announced definitive agreement to be acquired by a consortium of private investment funds.
• May 13, 2022: Elon Musk tweeted his intention to put the $44-billion deal for Twitter (TWTR) temporarily on hold.

Closed Deals:

• The acquisition of Intersect ENT (XENT) by Medtronic (MDT) on May 13, 2022. It took 280 days for this deal to be completed.
• The acquisition of Bottomline Technologies (EPAY) by Thoma Bravo on May 13, 2022. It took 147 days for this deal to be completed.

Top 10 deals with largest spreads:

Please do your own due diligence on deals with large spreads. Some of these large spreads might be related to regulatory issues or because of the way the deal is structured. We classify some of these deals as "special situation" deals in our merger arbitrage tool and provide additional details to help with the analysis. There may be unique situations related to special dividends, spinoffs, proration, etc. that need to be accounted for when looking at these spreads.

Symbol Announced Date Acquiring Company Closing Price Last Price Closing Date Profit Annualized Profit TWTR 04/25/2022 Elon Musk (N/A) $54.20 $40.72 12/31/2022 33.10% 52.76% TMX 12/14/2021 Rentokil Initial plc (RTOKY) $55.00 $43.11 09/30/2022 27.58% 73.48% BLCT 04/30/2022 Multelements Limited (N/A) $1.60 $1.26 12/31/2022 26.98% 43.01% ZNGA 01/10/2022 Take-Two Interactive Software, Inc. (TTWO) $9.86 $7.91 05/23/2022 24.65% 1285.44% BKI 05/04/2022 Intercontinental Exchange, Inc. (ICE) $85.00 $69.34 06/30/2023 22.58% 20.11% ATVI 01/18/2022 Microsoft Corporation (MSFT) $95.00 $77.74 06/30/2023 22.20% 19.77% CHNG 01/06/2021 UnitedHealth Group Incorporated (UNH) $27.75 $22.76 12/31/2022 21.92% 34.95% SJR 03/15/2021 Rogers Communications Inc. (RCI) $32.40 $26.86 06/30/2022 20.63% 167.30% TEN 02/23/2022 Apollo Global Management, Inc. (APO) $20.00 $16.63 12/31/2022 20.26% 32.30% SIMO 05/05/2022 MaxLinear, Inc. (MXL) $109.55 $91.94 06/30/2023 19.15% 17.05%

Conclusion:

SPAC activity increased significantly last week with four new SPAC IPOs filed and four SPAC business combinations announced. We also saw an uptick in merger activity including two multi-billion dollar deals. Recent market turmoil has led to the widening of a large number of spreads and merger arbitrage provides for fertile hunting grounds at this time.

Disclaimer: I have long positions in Twitter (TWTR), First Horizon (FHN), Tower Semiconductor (TSEM), Healthcare Trust of America (HTA), TEGNA (TGNA) and Bluerock Residential Growth REIT (BRG). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.