In 2016 I participated in the merger of Glacier Water with Primo Water (NASDAQ:PRMW), calling it at the time the merger arbitrage of the year. It was a somewhat complex deal with the payment composed of a mix of cash, stock and warrants and with a part of the stock portion of the deal locked up in multiple escrow tranches. At the end of 2017 I received the last Primo Water shares from escrow, making the merger arbitrage marginally profitable, but with some warrants remaining with an expiry date in December 2021 anything could still happen.
That something turned out to be the acquisition of Primo Water by Cott (NYSE:COT) this year in a combination of stock and cash. While the deal provided a nice boost to the stock price of Primo Water, it unfortunately also means a premature end of the warrants. In the merger the company will convert the warrants to stock, based on the $14/share cash consideration of the merger. I wonder if this is actually legally correct, because in the warrant agreement I don’t see anything about the possibility of terminating the warrants early in case of a corporate action. If I have a reader that is an expert in this subject matter I would love to hear from you.
That said, it is at this point just a theoretical discussion to satisfy my curiosity. With Primo Water trading above the $14 cash consideration that would be used to calculate the merger consideration for the warrants I decided to exercise them early, and sell the stock. That creates the following final picture of the results:
| Description | Date | # of PRMW shares | Realized price | Net cash flow |
|---|---|---|---|---|
| Buy 1 GWSV share | 10/24/2016 | – | – | -$22.98 |
| Cash merger consideration | 12/26/2016 | – | – | $12.1761 |
| Initial share payment | 12/26/2016 | 0.252975 | $12.73 | $3.2204 |
| 1st escrow release | 6/29/2017 | 0.154838 | $12.83 | $1.9866 |
| 2nd escrow release | 9/11/2017 | 0.154838 | $11.69 | $1.8101 |
| 3rd (final) escrow release | 12/20/2017 | 0.309676 | $12.75 | $3.9484 |
| Exercise warrants and sell stock | 2/13/2020 | 0.116049 | $15.29 | $1.7744 |
| Sum: | $1.9359 | |||
| IRR: | 14.40% |
As you can see the end result is okay, but not very spectacular. Unfortunately Primo Water proved to be a mediocre business with an equally mediocre growth in share price. When I bought Glacier Water in 2016 the stock was trading at $13.81. Now, more than 3 years later, while the stock market has exploded upwards PRMW is barely above $15/share. And that is after receiving a decent merger premium. So it’s easy to imagine how this could have turned out different, but truth to be told, it was also clear in 2016 that Primo Water was priced high.
Disclosure
No positions anymore