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