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Black Earth Farming merger arbitrage

Black Earth Farming is a Russian company that is listed on Nasdaq OMX Stockholm. Earlier this year the company announced that it had entered into an agreement to sell its Russian assets and liquidate the company. Yesterday the company received regulatory approval in Russia for the deal, removing the last potential obstacle to complete the transaction. Because of how the deal is structured there is some uncertainty about what the final payout will be, and that combined with the Russia factor probably explains why there is a decent spread left while the deal completion risk is almost completely gone.

The acquiring party is not simply acquiring all shares of Black Earth Farming, but it is buying the operating subsidiaries in Russia for approximately $184 million. At the holding company level $46.9 million in debt will remain, and approximately $50 million of working capital as well. The company expects to incur $5 million in costs to wrap-up the liquidation, and there are some warrants outstanding that will presumably be exercised as well. These things make the picture more complicated, and some uncertainty is added by the fact that the final price will be adjusted based on the total amount of intragroup loans and “certain purchase price adjustments”. The company anticipates that between $185 million and $193 million will be available for distribution to shareholders. Simply taking the midpoint of this number is a reasonable guess in my opinion, because usually these estimates are slightly on the conservative side. The person making them has nothing to gain by overestimating those numbers, while if they are too optimistic they might get unhappy shareholders and/or lawsuits.

If we take the midpoint of $189 million and divide this by 228.7 million of shares (this includes 18.3 million shares from the exercise of warrants and options) we get a per share amount of $0.826 or SEK 7.45. With the shares trading at SEK 7.00 this implies a spread of 6.4%. Not bad for a deal that is expected to close in May while the payment  to shareholders is scheduled for late June. There is some risk that the payment will end up being lower, but I think that is mostly variance with a neutral expected value. It could just as easily end up higher than lower.

There might also be a little bit of upside remaining after the initial distribution to shareholders. Black Earth Farming has earmarked $5 million for wrapping up the company, but if that amount proves to be too high (seems like a lot to me) the remaining cash will be distributed to shareholders as well. It will not be a lot, but I expect that it will be more than zero. Again, this is one of those things were underestimating the costs is only going to cause big troubles while picking an amount that is for sure sufficient has no real drawbacks.


Author is long Black Earth Farming