Black Earth Farming merger arbitrage update

I wrote about the Black Earth Farming merger slash liquidation in April. At that time the company expected to distribute between $185 and $193 million to shareholders at the end of June. Due to some delays in regulatory approvals that date has been pushed backwards to early September, and the amount of the distribution has been adjusted downwards as well. Shareholders are now expected to receive between $180 and $182 million which translates to SEK 6.68 and SEK 6.76/share, significantly lower than the initial company estimate that was between SEK 7.2 and SEK 7.5/share. In dollars the new estimate is just marginally lower than the bottom of the old range, but in Swedish krona the difference is a lot bigger so it seems that the biggest reason is simply a change in exchange rates (even though the company was partially hedged). Other contributing factors were lower crop prices, and some additional money that is being retained to fund litigation in the US.

I exited my position in Black Earth Farming a couple of weeks ago, because the spread at that time was negative if you would take into account the change in exchange rates. With the stock now trading at SEK 6.50 the merger is once again becoming marginally attractive. It’s a spread of just 2.8% compared to the bottom of the estimated range, but with the payment expected to arrive the 6th of September the annualized return of a long position is pretty solid 23%. With no real risks remaining I think that that is not bad, so I initiated a small position again today.


Author is long Black Earth Farming again

10 thoughts on “Black Earth Farming merger arbitrage update

  1. FK

    Do you hedge all your FX risk?

    I’m just wondering, because if you don’t, then the USDSEK move should be irrelevant to your position in this case.

  2. Mike

    Looks like they announced an adjustment to the share count. Was that anticipated in the projected payout figures?

    1. Alpha Vulture Post author

      I don’t know. They projected payout figures included 18 million of shares from options/warrants etc, but no idea if those new shares are issued because of those instruments, or a totally new and issued for some other reason.

  3. Jakob

    Today I have bought a position in the “stub”. The company has not given enough information to calculate the value of the stub but my guess is around 0.10 SEK and maybe a little above.

    – They have reserved 5M USD for the liquidation.
    – The have reserved an unknown amount for a US litigation. If they win (and they think they will) this will release the reserve.
    – They have probably either “over reserved” for the liquidation or have an extra buffer. Running out of money would cause big problems for management.

    My best guesstimate is 3M USD leftover which equates to 0.10 SEK.

    Could be wrong. Very wrong.

    1. peripatetic

      The company gave an updated guidance on liquidation proceeds yesterday. The range was surprisingly low and wide: “liquidation proceeds to be distributed to SDR holders will be in the range of
      USD 0.00135 to 0.00675, which corresponds to approximately SEK 0.011313 and SEK

      I’ve been buying the stub at about 0.04-0.05 SEK over the past weeks, so in hindsight I’m glad the limited liquidity kept me from making this a big position. Will not buy more unless it comes close to the bottom of the indicated range.

  4. Fundamentalist

    IB wrote saying that the shares redemption is subject to a Swedish coupon tax of 30% or less…
    This seems very odd to me given it is a capital distribution, but, hey, Sweds can have their own silly rules…

    1. Alpha Vulture Post author

      It’s probably a cross border thing. Maybe IB doens’t have the right paperwork filled in or something like that. Doubt that the Swedish are paying that tax. You can possible reclaim some of the tax in Sweden if IB can’t sort it out…


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