For the reasons outlined here, Genesis Land has been on this site's Stock Ideas page for about a year. Last week, the company received a buyout offer at a large premium, presenting a potential exit opportunity for investors who purchased the shares on the cheap. Unfortunately, based on the stock price reaction, the market doesn't believe the proposed deal will actually close.
While the offer was for $5.80 per share, shares closed at just $4.56/share yesterday. The press release disclosing the offer listed an intention to close the transaction by August 12th of this year, which is only four months away. As a result, the market is offering arbitrageurs the potential for an annualized rate of return of more than 80%!
Of course, that return is only realized if the transaction closes. Before that happens, a number of conditions must be satisfied, not the least of which is the fact that the buyer needs financing. The buyer is a brand new company with no operations, recently incorporated by a Calgary businessman named David Crombie. Crombie will now attempt to raise several hundred million dollars in just four months in order to complete this transaction, which would be a rather daunting task for most individuals.
So now that an offer has been made, should investors take their profits and sell, despite the large discount at which the stock trades to the buyout offer? That would be the safest thing to do, but may not be the wisest.
First of all, the buyout offer isn't at some pie-in-the-sky valuation whereby the stock will fall precipitously if the transaction fails. The stock is only up a few percent following the offer announcement, so the immediate downside does not appear large.
Furthermore, the company is now clearly in play, which could bring a competitor or strategic buyer to the forefront. The breakup fee on Genesis' side is only $500,000 (or just over a penny per share), which should act as little deterrent for a well-financed real-estate development company looking to grow their size and reach. Third-party appraisers have put the value of Genesis' land holdings much higher than its current price, which could entice a buyer to come to the forefront now that an offer is on the table.
Normally, I don't like to play the role of risk-arbitrageur. But in this case, the market's discount to the offer price coupled with the value of the firm's underlying assets suggest that the downside risk is low relative to the upside potential. As such, I'm sticking with it despite the significant chance of a price retreat in the event of a failure.
Disclosure: Author has a long position in shares of GDC