Destination Maternity: a merger spread you won’t believe

At the end of last year, on the 20th of December, Destination Maternity (NASDAQ:DEST) and Orchestra Prémaman (EPA:KAZI) announced that they had entered in a definitive merger agreement in which Orchestra Prémaman would acquire Destination Maternity in an all stock deal. Destination Maternity shareholders are going to get 0.515 Orchestra Prémaman shares in the form of ADSs that will be listed in the US and will own 28% of the combined company after completion of the transaction. The consideration represented a 34% premium at the time of the announcement, and since it’s a deal between two relative small companies with no regulatory or financing risk you wouldn’t expect a huge merger spread.

This couldn’t be farther from the truth than possible though. Ever since the deal was announced the spread has bounced around 20% (although sometimes spiking down or up significantly), and in the past week the spread has exploded to a totally ridiculous 63%. This week the spread has come down a bit again, but is with 36% still offering an extremely compelling opportunity in my opinion. I wrote an article about it on Seeking Alpha that after a 24 hour embargo is now accessible for everybody. You can find it here.

Source: authors own calculations, based on Yahoo Finance pricing data

Disclosure

Author is long Destination Maternity

7 thoughts on “Destination Maternity: a merger spread you won’t believe

  1. JY

    Hey AV, thanks for the post. Great work as always.

    Just trying to figure out the mechanics of SA Pro (in light of the significant narrowing of the spread since your post), did you post this on SA Pro on the 23rd of May?

    J

    Reply
  2. pogonific

    Only just discovered your blog, but it’s amazing, thanks!

    I looked at this last week when the spread was over 100%. The things that put me off are two fold:
    1. It’s now been nearly 6 months and DEST has still not published their proxy.
    2. I have no interest staying long maternity retail for months on end, so I’d have to short Orchestra. But the borrow rate for Orchestra Premaman is somethign like 8-10%.

    Are you hedging? I guess not. I think I’ll probably wait for the proxy to come out, there should be some spread left.

    Reply
  3. Keith

    Hi

    May I know how you calculate the spread premium? Based on my calculations, I can’t seem to get 60% spread. The highest I can get is 51%. I am using (0.515 X KAZI Price – DEST Price) / DEST Price. Am I calculating it correctly?

    Reply
  4. Marek

    The issue might be (i)liquidity of Orchestra – only few hundred/low thousands of shares traded each day

    Reply

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