Last time I outlined that given the risks, the market is attributing an excessively high probability for the successful takeover of Anvil Mining Ltd. (AVMNF.PK) by Minmetals Resources of China (MMR).
As we come closer to the expiration date (February 16, 2012) of the third extension of the offer by MMR, the probability attributed by the market has only risen. As the table below illustrates, the market is currently placing about a 94.5 percent chance that the takeover will succeed.
Scenario | Deal Succeeds | Deal Fails | Deal Adjusted | Total |
Probability | 94.50% | 5.50% | 0.00% | 100.00% |
Expected payoff | -$0.12 | $0.11 | $0.00 | $0.00 |
It puzzles me why anyone would pay the current market price given the capped upside and the significant downside.
As the table below shows, when using Tuesday's (February 7) closing price on the Toronto Stock Exchange, the upside is muted between 1.53-2.04 percent, depending on whether the buyer intends to tender the shares or sell after the offer is given the green light.
This small gain is hardly worth the risk of losing roughly 26 percent if the deal falls apart.
Scenario | Deal Succeeds | Deal Fails | Deal Adjusted |
Short price | $7.84 | $7.84 | $7.84 |
Purchase offer (net of arbitrage) | $7.96 | ||
Price prior to offer | $5.77 | ||
Price ex. Mutoshi project (net of arbitrage) | $7.69 | ||
Gain/(Loss) | -$0.12 | $2.07 | $0.15 |
Return on investment | -1.53% | 26.40% | 1.91% |
As mentioned in my previous article, shorting the stock makes much more sense, as the potential loss is capped and the gain is substantial.
A note of caution, this is a speculative bet that comes with risk - although calculated risk.
To review the news release detailing the third offer extension see here (pdf).
Disclosure: I am short Anvil Mining Ltd. on the Toronto Stock Exchange
