ROI Acquisition Corp. II is a blank check company that consummated an IPO on September 20, 2013 that raised $125 million. At the end of July the company announced that it had found a suitable target and that it would buy Ascend Telecom Infrastructure, a provider of telecom infrastructure in India (investor presentation). Concurrent with the merger the company intends to exchange its outstanding warrants. Initially the company wanted to exchange all warrants for $0.50/share in cash, but that offer was revised today to the following:
Under the revised Warrant Amendment Proposal, warrantholders would have the option to either:
- have their warrants survive and become exercisable for Ascend Holdings ordinary shares following the closing of the Business Combination in accordance with the terms of the Warrant Agreement, as amended; or
- have their warrants exchanged at the closing for $1.00, comprised of $0.50 in cash and 0.05 of an ordinary share of Ascend Holdings.
While I already had a position in the warrants (subtle brag) before this announcement I think that the warrants are today even more attractive than before for a merger arbitrage play. The value of the warrants has increased with 100% while the price has lagged and is up just ~70% (as of this moment). With the warrants at $0.60 you can make a whopping 66.7% return when the merger is completed. That’s a pretty insane return for a merger arbitrage.
At the same time, the fact that the exchange proposal has been revised higher and to include an option for warrant holders to keep their warrants is probably a positive signal. The only reason for keeping your warrants is when you think that the surviving company will be worth a lot more than $10/share in the future. The warrants have a strike at $11.50 while they are callable when shares start trading at $24.
While the possible return is very high this is also a deal that has more risk than your average merger arbitrage. When the merger isn’t completed the warrants are going to be worthless because in that case ROIQ will be wound-up and cash will be returned to shareholders. When you own a normal stock instead of warrants during a merger arbitrage your downside is usually a couple of dozen percent to something in the direction of the pre-deal price. Because of this I think that ROIQ warrants should offer a return that is roughly three or four times higher than a normal merger arbitrage, and the position should also be sized accordingly.
But even when we adjust for the higher risk the deal appears to be very attractive. A 65% return divided by four is still more than 16%, and usually something like 4 or 5% is already a pretty big spread. The current spread is basically implying that the probability of this deal going through is just 60%, which I think is way too low. But perhaps I’m missing something?
Author is long ROIQW