An Easter merger arbitrage idea: Asta Funding

The first company I wrote about on this blog in 2011 was Asta Funding (NASDAQ:ASFI). Looking back, an ambitious start since it was certainly not a stock that was easy to analyze. I sold it in 2014 for a marginal profit, but Asta Funding always stayed on my radar. Last year it looked like the story would finally finish when the CEO of the company submitted a non-binding proposal to take the company private at $10.75/share. With insiders already owning a majority of the outstanding shares and the company having a book value of $13.71/share (of which a large part consists of cash, US treasury bills and equity securities) it was a deal that made sense and until recently the stock traded at a tight spread to the proposed offer.

However, last month changed everything. Merger spreads exploded everywhere, especially for deals that were not yet definitive. I had my doubts as well about this one, even though it was a good deal and the large cash balance would make the company pretty immune to the impact of the coronavirus. To my surprise Asta Funding announced last Wednesday that not only did they sign a definitive merger agreement, the price was also increased  to $11.47/share, making this one of the very few new deals that were inked in the past few weeks. In normal market circumstances you would expect a cash deal like this with no regulatory risks and no financing risks to trade at a spread of almost nothing.

Of course, we are not living in ordinary times. But for a deal that was signed this week that doesn’t really matter. You would not expect the buyer getting cold feet because he knows exactly what he is getting into, and of course, the merger agreement explicitly states that the impact of a pandemic cannot be a material adverse effect. Many deals that were signed in the months leading up to the big outbreak outside China also have this clause. While many of them are probably also interesting arbitrages, here we not only know that legally the acquirer will have a tough time of walking away, but also that he doesn’t have any interest in doing so.

With the stock trading at $11.05 while it is being bought for $11.47/share the spread is currently 3.8%. Not bad for a deal that I think is extremely low risk, and will most likely be completed before the end of June. I couldn’t resist picking up some shares, but kept my position size reasonable small. There are so many interesting merger opportunities that it is hard to pick which ones to buy, and while I think this one has a low risk, the reward is also not super big.


Author is long Asta Funding

10 thoughts on “An Easter merger arbitrage idea: Asta Funding

  1. pogonific

    Hey AV, this looks nice. Have you looked at SORL? They just filed the proxy so presumably deal still on?

    Also, do we get to find out how AV did Q1? I keep checking – hope not too bad.

    1. Alpha Vulture Post author

      Yeah, that one is on my radar as well. But with a Chinese buyer I’m not very confident. Normally I like Chinese deals because the buyer is usually getting a good deal so has a big incentive to get things done. But is that really still the case with SORL? Autoparts can’t be a good business right now.

      And I wouldn’t put any value in the fact that they filed a proxy. When a deal is signed both parties will presumably just continue with all the legally required steps, and especially the party that is not the one that potentially wants to walk. I guess seeing a proxy is slightly better than not seeing one, but doesn’t really impact what I think about the deal.

      And re Q1: I never do quarterly results, but it went okay. Better than the index…

      1. Pogonific

        Right, but SORL is being bought by the chair and ceo – so why would they carry on with the proxy if they didn’t mean it? (No position btw, but thinking seriously about it).

        Another curious little thing you might like is Doric Nimrod Air 3. 4 7 year old A380s leased to Emirates. If Emirates doesn’t default on the lease (and that if really is the main risk) you get your capital back in divs alone and at the end of the lease your upside is whatever a debt free 12 year old A380 sells for. I reckon the chance of a peteostate owned airline defaulting is pretty low… also no position.

        1. Alpha Vulture Post author

          Because no-one wants to be the party that breaks the merger agreement early for no good reason, even if you would absolutely not want to continue with the merger. If you wait things might turn around and the deal might become okay after all, if you wait the other party might do something or something might happen that allow you to shift the blame etc. You’re not going to break the contract if you can just continue with the dance. If in the end you really really don’t want to do it you can still walk away in the last minute.

          1. David

            Agreed. Ruili Group did retract their bid somewhere in 2015/2016 because of bad market conditions. However, they retracted very early in their negotiations, so it’s a bit different right now. I think it’s probably a decent deal at current spread but there are better ones out there.

  2. mike

    I found a potentially undervalued fund. The current stock price is usd 3.56 and the latest reported NAV is usd 17.7. However, the value of the assets of this fund is questionable as it is not based on market value.
    A shareholder has made a proposal to liquidate the fund. Could this be an interesting investment idea similar to the Italien REITs? see here:

    1. Alpha Vulture Post author

      I have looked at SVVC in the past, it’s one of the obvious cheap things based on the huge discount that it. I’m not sure NAV reflects accurately the asset value of the funds, but it’s probably a lot higher than the current price. But given the high fees that the company pays it really needs to be liquidated, and the sooner the better. I’m not sure a non-binding shareholder proposal that management doesn’t support will make a difference, even if it gets enough votes (it should).

  3. Seid

    I agree SVVC looks cheap but it is hard to value the company due to the holdings are not publicly traded. So what the fund actually worth is as good as mine.

  4. Mike

    It appears that Italian REITs that you covered by this blog have suffered greatly/crashed from the developments in Italy. Is it still worth holding on to them? It could be difficult to sell property in Italy now.


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