Risk-arbitrage traders have a new deal today. DFC Global (NASDAQ:DLLR), the banker to the unbanked, is facing a big debt load, regulatory issues, and markdowns in its gold assets and has agreed to sell itself for $9.50 per share to a private-equity firm. This is a long way below levels the stock once inhabited, although it's about 50% above February's low. In the pre-market, the stock had been bid slightly above the deal price in hopes that another buyer will materialize.
The real winners this morning own DFC Global 3.25% convertible bonds. These bonds had several other pieces of debt due in front of them, but an acquisition effectively equalizes all of the bonds. These were quoted around $0.85 on the dollar before the announcement, which had amounted to a 9% yield to the bonds' 2017 maturity. DFC Global has three convertibles outstanding -- since the buyout is a cash deal, the "poison put" feature requiring the buyer to redeem the convertibles at par appears to be invoked. The other issues were quoted in the low-to-mid-90s before the deal, so the gain is substantially less.
Accordingly, holders of the 3.25% notes appear quicker to take profits this morning, and the bonds are now offered below $0.98 on the dollar. Investors getting the bonds at, say, 97.5 this morning would make an annualized return of around 8.5% if the deal closes in six months. That's a lot better than the return shareholders buying the stock this morning will get unless a higher bid materializes.
One possible concern for arbitrageurs considering playing the deal via the convertibles could be a competing bid using stock instead of cash as merger consideration. If this happens, although stockholders would likely benefit, the poison put would likely not be invoked, and the convertibles would likely fall back to a price in the low 90s.
But traders who think the announcement earlier today is a "done deal" should take a long look at DFC Global's convertibles at current levels.
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