Pharmstandard tender offer arbitrage

Pharmstandard is a Russian pharmaceutical company that is controlled by Victor Kharitonin. He is trying to take the company private (after IPO’ing it in 2007), and to make this happen Augment Investments has launched a tender offer for the GDRs that trade in London. The company is offering US$5.50/GDR while these last traded at US$5.31 for a spread of 3.6%. That doesn’t sound like a whole lot, but with the tender offer expiring at the end of next week the potential IRR is pretty high. If we assume that it takes another week before payment is made the IRR is would be ~150%. With Augment Investments waiving the 50% minimum acceptance condition this appears to be a low-risk transaction, although there is some amount of unquantifiable random Russian risk: you never know if all parties continue to play by the rules.

In addition to this the full tender offer memorandum is nowhere to be found online, and the company has so far not responded to my request to provide it. So perhaps I’m missing something that everybody else knowns… Despite that, I think buying a couple of shares and tendering them is a decent bet. Otherwise, I’m hoping I have a smart reader that knows more!

Pharmstandard shareholder structure

Disclosure

Author is long Pharmstandard

9 thoughts on “Pharmstandard tender offer arbitrage

  1. GB

    Love your work. But may I humbly suggest that to annualise the returns from very short term arbitrage plays is risky. You want an absolute amount of profit to justify the risk, too (certainly not saying this one isn’t worthy, though).

    Reply
    1. Alpha Vulture Post author

      I totally agree with you, and as a matter of fact I only calculated the IRR for this post. At the same time the short term nature of this transaction is a big part of the attraction. I wouldn’t have been interested in this if this had some uncertain closure date in Q4 2015 or something like that.

      Reply
  2. xerty

    No withdrawal rights mean you could get stuck in this for a while, for example if they extend it to try to drum up more participation. Not a deal breaker, but not a good feature either.

    Reply
    1. Alpha Vulture Post author

      Good point. From what I have seen this provision is common with Russian tender offers. So far I haven’t seen it being used, and hopefully PHST isn’t going to change that…

      Reply

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