Allied Irish Banks (AIB.IR) was nationalized in 2011 by the Irish government and it now owns 99.8% of the outstanding shares while the remaining 0.2% remains in public hands. At the time of the nationalization 25% of these shares were traded in New York as ADRs (AIBYY), and because of this development the depository decided that it would cancel the ADRs. As a result they have started to sell the shares underlying the ADRs on the Irish stock exchange, and when the selling is done the cash will be returned to ADR holders.
Because the depository owned a big part of the outstanding float the sale process is taking some time. They have started selling shares on April 10, 2012 and at the end of 2013 they managed to sell 65% of their shares. Because of this the ADRs now consist mostly of cash instead of Allied Irish Banks equity, but despite this fact they trade as if this is not the case.
A Seeking Alpha article alerted me to this opportunity this weekend, and it’s worth a read to get some more background information. Unfortunately the methodology employed by the author to calculate the value of the ADR, and the time remaining before redemption is seriously flawed because he uses a time-weighted average price to estimate the average selling price instead of a more realistic volume-weighted average price.
We first need to figure out how much shares have been sold. We know what the number was at the end of 2013, but we don’t know how much has been sold so far this year. I will assume that the depository continues to account for the same percentage of the market in 2014 as it did in the previous years. I think this is a good assumption because in these kind of transactions a broker usually gets an instruction to sell everything as fast as possible, but with a threshold based on the average traded volume to prevent a too big market impact.
- Total trading volume from 10 April, 2012 to 31 December, 2013: 597 million shares
- Number of outstanding ADRs: 26.5 million (underlying shares: 265 million)
- Number of shares sold in this period 172 million (3.5 shares remaining per ADR at the end of 2013 => 6.5 * 26.5 million)
- This means that the depository accounted for 28.88% of daily volume in 2012/2013.
- Volume in 2014 has been 238 million shares
- This means that it could have sold another 68.8 million shares
- This implies that just 0.91 shares are remaining per ADS
- The volume weighted average price between 10 April 2012 and today is €0.0993
- The current share price is €0.12
- The EUR/USD exchange rate is 1.3875
We now know everything that we need to know to value the ADRs: It’s simply the number of shares sold so far times the average price plus the value of the remaining shares. This gives the following result:
(9.09 * €0.0993 + 0.91 * €0.12) * 1.3875 = $1.4032
With the ADR trading at $1.61 it is significantly overvalued, especially considering the fact that there will be a $0.05 fee when the ADR is cancelled. With less than one share per ADR remaining there is also a clear catalyst for this short. At the elevated trading volume that we have witnessed so far in 2014 selling the remaining 24 million shares should take less than two months. A good thing considering that we do need to pay a 5% borrow fee for the privilege of shorting the stock.
Shorting AIBYY seems a relative save way to generate a return that will be uncorrelated with the market in a short period. There is of course uncertainty with regards to the exact value of the assets underlying the ADR and there are also other risks related to shorting such as facing a buy-in notice or just seeing the borrow fee getting increasingly expensive. But at current prices I think you are paid more than plenty to take these risks.
Author is short AIBYY