ACFC is trading at $4.42, down from $4.80 when I originally wrote the article (the stock fell 5% on Friday). I still think that is almost $1 over fair value given the underlying fundamentals of the deal, Not to mention the length of the actually receiving what may or may not be ultimately $5.00. The deal is scheduled to close late in the second quarter.
Here is an update:
On Thursday, March 27th, ACFC board members Jay Sidhu and Bharnu Choudhrie filed SEC Form 13-D/A (this Schedule discloses beneficial ownership of certain registered equity securities). In this filing, Sidhu and Choudhrie wrote a letter to the Board of Directors of ACFC. In this letter, Sidu and Choudhrie both backed up my article from last week in stating the buyout price was only worth $3 now, and maybe up to $2 in at least one year's time:
"This is not a $5 per share deal. Only the $3 payment is guaranteed, so fully 40% of the consideration payable to ACFC stockholders is contingent consideration. And the contingency is not related to any earnout or similar situation where there is risk-sharing between buyer and seller may be understandable. Here , the additional $2 is being held back to provide indemnity for ACFC stockholder claims...."
"The $2 holdback for stockholder claims is of great concern to us, as we believe it is likely to have a coercive effect on ACFC stockholders. We believe that this is not a common term in public company M&A transactions generally and it seems to us to be particularly inappropriate under the current circumstances..."
The two board members then go on to say that they are not going to vote for the merger and demand the board recapitilize the company.
Now Jay Sidhu is a very smart and successful banker. He created and drove Sovereign Bank into a powerhouse before the housing crisis. He is currently CEO of Consumers Bank, a nearly $2 billion bank headquartered in Pennsylvania. If Sidhu can see the value of the shares is currently only $3 with the promise at most, $2 in at least year, can't the market?
I have another question regarding this deal? Why wasn't a Contingent Value Rights Security, or CVR, created for this deal. A CVR is a type of right that is given to shareholders of an acquired company. The CVR usually trades on an exchange and is subject fluctuation. The CVR will increase in price if the additional benefit of the specified event occurs.
In this case, if there are not claims against ACFC for asset impairment, the CVR would increase (i.e. shareholders would receive closer to $2 after at least one year) If there were more claims against ACFC for asset impairment the CVR would decrease (i.e. shareholders would receive less than $2 after at least one year).
It seems to me that any price currently above $3.50-$3.75 for ACFC common stock seems like a gamble, as what part of that $2 to be returned to you, after at least one year, remains very unsure.
As mentioned Sidhu and Choudhrie also want the board to explore recapitalization of the company. However, I think the nature of this current deal (a 8.25% breakup fee) makes such an effort a low probability.
The company seems to agree with this thought as on Friday, March 28th, proxy materials to be sent to shareholders were mailed.
I still think this stock should be sold or shorted down to $3.75 until more information becomes known. If you are short be careful as the float is thin.
Disclosure: I am short ACFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.