Comtrex Systems merger arbitrage

Thanks to a blogpost of NoNameStocks I was alerted to the fact that Comtrex Systems (OTCMKTS:COMX) is being acquired by Zonal Hospitality Systems in an all-cash transaction for approximately GBP 7.46/share (~US$9.88 at the time of writing). With the stock trading at $9.43 there is a spread of 4.8% remaining which seems pretty high considering that this sounds like a low-risk deal that should close pretty fast.

    1. There are no regulatory hurdles to take.
    2. More than 50% of Comtrex shareholders have already entered in voting agreements, so stockholder approval is a formality.
    3. There shouldn’t be financing issues since Comtrex is a tiny company (~US$16 million market cap) with a significant cash balance.
    4. Comtrex is being acquired at a ~60% premium, so no crazy downside risk if the deal fails.
    5. And to top it all off: it’s a deal that at first glance seems to make sense for both companies since they are in the same business (point-of-sale stuff for the hospitality sector).

The only question mark is that the merger consideration is subject to certain adjustments, but without a merger agreement publicly available it remains a guess what those are. My guess is, and I think this is the most likely scenario, some kind of adjustment based on net working capital and net cash balance at the time of the merger. This is very common, and usually this adjustment is just as likely to result in a higher price as in a lower price. Especially since Comtrex is a solidly profitable business this is unlikely to be a large risk. It’s not some kind of melting ice cube that gets smaller and smaller while waiting for the merger to be completed. But we will have to wait for the proxy statement, which is expected to be send to shareholders in a couple of weeks, to be sure what the deal exactly is.



22 thoughts on “Comtrex Systems merger arbitrage

  1. Dan

    This is great. As I wrote that post I was thinking “I wonder if Alpha Vulture would think this is a good arb?” Haha

  2. Paul

    Happily cashed in at 10.00 (unfortunately just a few shares :P) and 9.60 leaving you arb guys some pennies 😉 Entry at 2.50 18 months ago. Big thanks to Dan for spotting this one.

  3. Basedshark

    My bid of $9.30 at open didn’t take. Bummed to have missed this one. Congrats to all who were in this from the beginning.

  4. steve wellington

    I shorted at $2.50 2 years ago.

    And I can’t buyback shares as i have no cash. I’ve margined up for this. I thought it was going to zero. I have negative cash balance – what do i do?

  5. Nicholas

    Hi, I couldnt find any document on the filings on the SEC website. In fact last filing for COMX was in 2003. Any idea where I can find the merger document ?

  6. pogonific

    Are you doing anything on FX? GBP/USD has been flapping like a flag in a hurricane these last couple of months?

    1. Alpha Vulture Post author

      Nope, I basically never hedge FX since I believe changes in FX rates have 1. a neutral expected value and 2. I’m agnostic to which currency I have exposure to (with some limits of course).

    1. Alpha Vulture Post author

      There is for sure a nice spread… but at the same time it’s not exactly a sector I would be thrilled to be long and hedging is near impossible either with a almost 60% borrow fee. I would certainly expect that the deal would get completed. But what will happen with the stock prices in the meantime??

      1. German reader

        I know and I’m not involved either. But I thought I’d bring it to your attention if you are interested.

  7. Michael Hess

    Have you looked at RSYS? It’s a risk-arb and the spread seems really wide. $1.72 deal trading at $1.50 right now and should close in October or November for 40-50% annualized return. Buyer is Reliance, a Global 500 company based in India — they’re large enough that they certainly have the cash on hand. RSYS is relatively small; I can’t imagine there’s a CFIUS issue. Check it out and let me know what you think!

    I enjoy following your blog — thank you!


    1. Alpha Vulture Post author

      Hi, yeah I have looked at that one. Certainly interesting. I’m not so sure about the CFIUS risk given that they are in crucial communications technology… and secondly, their financial positions isn’t so brilliant.

  8. Mike

    I saw the proxy for this one. GBP 2,000,000 will be tied up in escrow for two years (if you ever get it) and there are some other adjustments that can negatively impact the consideration. I don’t really see this one as enticing given the price. Do others agree/disagree?

    Shareholder meeting is July 31.


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