Investing With An Edge: Campus Crest

| About: Campus Crest (CCG)

Summary

Campus Crest is getting taken over.

The deal is expected to close in the near future.

The spread is interesting on its own but represents a fantastic IRR on such a quick close.

This is the latest in my "Investing with an Edge" series. For more on the series, please see here.

Company: Campus Crest (NYSE:CCG). Reasons for opportunity: small size, complex structuring, break fears.

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Campus Crest is getting acquired by Harrison Street. The shareholder vote is scheduled for Tuesday, January 26th, and the deal will close soon after. Shareholders will receive $6.97 in cash plus a CVR worth about ~$0.04 that should pay out quickly. Let's call the total payout $7. Shares currently trade at $6.77.

That $0.23 discount might not seem like a lot. After all, it's only a ~3.4% return. But it's actually a huge return. The deal should close next week, so the annualized return from buying CCG and having the deal close is well over 200%.

Why do shares trade at such a large annualized return? Markets have been poor recently, and investors are obviously pricing in some chance that the deal breaks. A deal break is definitely a possibility: The termination fee (what Harrison needs to pay CCG if they walk away from the deal) is laughably low at $10m (~2% of the equity value, and even less if you factor in the value of CCG's preferred and senior notes that will be taken out as part of the deal), so if Harrison decided they didn't want to do the deal for some reason (spooked by market volatility, financing costing more than expected, etc.) they could easily walk away.

Will Harrison walk away? Anything is possible, but it seems like the chances are pretty minimal. Harrison is a strategic buyer with significant other student housing assets, and a bit of market volatility doesn't change the strategic rationale for the deal. And, aside from the low break-up fee, the merger agreement is decently tight: no financing conditions or other conditions that could delay the deal, deal closes quickly after shareholder approval, etc.

It's also interesting to note that a director has been taking advantage of the spread to buy into the stock. He bought 10k shares on Jan 15 for $6.77 a share, and then bought another 20k for $6.75-$6.76 on Jan 20. Given he owned just ~72k shares before he bought those 30k shares, that level of insider purchasing certainly suggests he thinks the deal is going through!

Given the opportunities for 100%+ annualized returns don't come along every day, it's also worth asking why this opportunity exists. I think it's a combination of factors:

  1. The recent sell off has led to wider spreads in a lot of deals; for example, Precision Castparts (NYSE:PCP) trades at a ~1.5% discount to the price Berkshire is buying them at. While that might seem like much, the deal is likely to close in February so the annualized return is ~20%.
  2. This is a relatively small company (~$500m market cap), and a lot of the major arb funds can't take a position in companies this small.
  3. While the annualized return is outstanding, it's due to the short time frame, not a large spread. That keeps a lot of investors from even bothering to look.

I will mention that CCG has publicly traded preferred stock which will be repaid as part of the deal. The preferreds trade at a discount to what they will be taken out at (slightly more than $27, consisting of $25 in face value plus $2 in accrued dividends that were not paid in 2015 plus a small stub dividend accruement since the last missed dividend Jan 15) and have less downside if the deal were to break than the common does, so they also make for an interesting opportunity.

All in, CCG is a very interesting opportunity. Best of all, the situation will play out very quickly, so it should be fresh in reader's minds and give them an excellent opportunity to call me a hero (if the deal closes) or a goat (if it breaks) in the comments section.

Disclosure: I am/we are long CCG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.