Acquisition Of Opta Minerals By Speyside Equity Offers Merger Arb Opportunity For Small Accounts

| About: Opta Minerals, (OPMMF)

Summary

Opta minerals trades at C$0.50 in Toronto.

Consideration is either C$0.5202 cash or C$0.3526 cash plus C$0.1676in an unsecured subordinated promissory note.

All cash is better option and offers return of 4.04% at current price.

Expected to close on April 1, 2016.

A caveat first: Due to the low trading volume purchasing shares of Opta minerals (OTC:OPMMF) is only feasible for small accounts:

Table 1:Last trades Toronto

Time

Price

Shares

03/18/2016 9:33 AM EDT

0.50

18,000

03/17/2016 2:29 PM EDT

0.50

11,000

03/17/2016 12:22 PM EDT

0.50

19,000

03/17/2016 11:37 AM EDT

0.51

20,000

03/14/2016 9:59 AM EDT

0.50

1,000

03/11/2016 9:32 AM EST

0.50

7,500

03/10/2016 3:33 PM EST

0.50

5,000

03/10/2016 2:54 PM EST

0.50

5,000

Click to enlarge

Opta Minerals is a Canadian Company trading on the Toronto Stock exchange. The market cap is just 9m Canadian dollars. It is important to use limit orders due to the low trading volume.

Shareholder approval

The necessary shareholder approval is guaranteed, as 69.2% of the shares are tight to vote in favor of the deal:

"SunOpta Inc. ("SunOpta"), the Rollover Shareholder and the directors and officers of Opta Minerals (with the exception of Mr. Austin Beutel), together holding in the aggregate approximately 69.2% of the outstanding Opta Shares, have entered into support and voting agreements pursuant to which they have agreed to support and vote in favor of the resolution to approve the Amalgamation (the "Amalgamation Resolution") at the Meeting. The support and voting agreements entered into by SunOpta and the Rollover Shareholder cannot be terminated in the event of a superior proposal for Opta Minerals. SunOpta has also irrevocably agreed under its support and voting agreement to elect to receive the Cash and Note Option pursuant to the Amalgamation."

Deal consideration

If the shareholder does not elect to receive the consideration which includes the promissory note by 9:00 a.m. (Toronto time) on March 29, he/she will be cashed out at C$0.5202 per share, if the deal goes through.

I will not opt to get the note and just wait to receive the cash. The upside is very easy to calculate in this case:

price

Exit price

return

0.50

0.5202

4.04%

Click to enlarge

Despite the main shareholders opting for the payment in cash and note, this is not the best option for the minority shareholder. The Subordinated Notes will be unsecured direct obligations of Amalco, which is the resulting company of the proposed Amalgamation of Opta Minerals and the acquirer. The interest rate is just 2% per annum (payable at the earlier of the maturity date or the date on which all principal outstanding thereunder is repaid). They mature 30 months following the date of issuance. Additionally the notes are subject to prepayment. This makes them a bad risk-reward.

In my opinion there should be no Canadian withholding tax on the tax consideration

If part of the payment would be deemed to be a dividend there would be Canadian withholding tax substracted as far as I know. I am no tax expert though. The company expects that "no deemed dividend should arise":

"The amount paid on the redemption of an Amalco Redeemable Share in excess of the paid-up capital of the share as determined for purposes of the Tax Act will be deemed to be a dividend (subject, as discussed below, to the potential re-characterization as a capital gain in the hands of certain corporate Shareholders). It is expected that the paid-up capital of each Amalco Redeemable Share will exceed the redemption price of each Amalco Redeemable Share and, accordingly, no deemed dividend should arise on the redemption of the Amalco Redeemable Share, however, there are no assurances in this regard."

Conclusion

Because the company expects the Effective Date will be on or about April 1, 2016 the return of 4.04% offers a great annualized return for the small shareholder. Of course there is the possibility of the deal not going through, but this is not probable. The time-frame for Material Adverse Effects to occur and break this deal is very short. I believe the spread is this large because the deal size is very small. There are also just 18 people following the company on Seeking Alpha.

Important Source: "Management information circular - English" dated Mar 10 2016 from Sedar.com

Disclosure: I am/we are long OPMMF.

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.

Additional disclosure: I am not long the US ticker but purchased the stock on the Toronto stock exchange.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.