What has been the craziest merger arbitrage stock of the past year? My vote is for AVG Technologies (AVG) (OTCPK:AVGTF).
AVG is a Dutch stock that entered into a merger agreement with Avast Software on July 11, 2016. The deal was structured as a cash tender offer at a price of $25 per share, a 33% premium to AVG's price from the day before. I wrote an article on AVG in September. For those shareholders who tendered, this was an ordinary M&A deal. In fact, by October 17, almost 97% of the outstanding shares were tendered and payment for those shares was made.
Since more than 95% of the shares were tendered, the company then performed a compulsory acquisition - a compulsory result in a Dutch court determining the final share price for the remaining shares. It could differ, either higher or lower than the original price, in this case $25, but based on history, it would be extremely likely that the court would decide on $25, since at least 95% of AVG shareholders had agreed to that price.
After the tender expired, AVG changed its symbol twice and traded over the counter, where it is still trading today. This was now an illiquid stock that at first glance should have ultra low volatility. But option buying hinted of something else. The 25 strike calls were being bought in size across multiple series. Day after day, calls were exercised. Those on the other side of the calls became short the stock at $25. But with a small float, there were no shares available to short, creating a situation of forced covering. The shares were bought in at a price greater than $25. How much greater? On November 17, AVG actually traded up to $35. A whopping 40% higher than the price of the deal (the chart below shows just part of the spike).
The Latest Twist
Fast forward to February 15, when Avast published a press release revealing the court's decision. As expected, the court determined that $25 was indeed a fair price to pay for AVG. However, the money that was held to pay the remaining 3% was in Euros.
The Enterprise Court found that EUR 22.84 (being the offer price of USD 25.00 converted into EUR against the exchange rate of October 31, 2016) is the fair squeeze-out price per share in AVG and ordered all minority shareholders of AVG to transfer their shares to Avast in exchange for a payment of EUR 22.84 per share in cash-Avast PR
The Floating Euro
So because the Euro had declined significantly since the tender closed, the current value of AVG in dollars, as of today, is $24.21 (22.84 x 1.06 (Euro conversion price) = $24.21. Of course, currency values are always changing, so until the squeeze-out is completed, the price could rise or fall from the current price.
Interest
Price increased by statutory interest to be calculated over the period from October 31, 2016 until the date of transfer of the shares-Avast PR
While Avast was holding the remaining money these past 4 1/2 months or so, interest had accrued. My informed understanding is that the rate paid will be 2%. That's an extra 18c.
.02 x .375 (4 1/2 months/12) x $24.21 = .18
Current total value of AVG
Adding $24.21 to .18 = $24.39
Choice #1 for shareholders
Up until March 15, 2017, shareholders of AVG may voluntarily adhere to the judgment of the Enterprise Court by transferring their shares in AVG to Avast- Avast PR
Don't do it. Instead, sell on the open market.
Bid/Ask $24.68-$24.72
Choice #2 for shareholders
On or shortly after March 16, 2017, Avast will enforce the judgment of the Enterprise Court against the remaining shareholders of AVG and pay the aggregate squeeze-out price for the remaining shares in AVG into the consignment fund of the Dutch Ministry of Finance- Avast PR
Don't wait. Instead, sell on the open market.
Option Market
There are about 5,300 25 strike puts still open. Some of the puts expire in March and some in June. With the euro at 1.06 and fair value of AVG shares at $24.39, the 25 puts are worth .61. The March ones have traded at .35-.40 the last few days, making them good ones to buy to close for anyone who is short the puts (options are closing positions only in AVGTF). BUT, what if the squeeze-out occurs after March 17? Then the options will adjust to the last traded price of AVG. At the moment, that would be $24.70, so the 25 puts would be worth 30c. But with currency risk, potential short squeeze risk and timing of the close risk, closing out ones position at 40c or lower seems prudent.
Conclusion
AVG Technologies has been an interesting, complicated, unusual M&A stock. Its days as a public company are down to its final two weeks. Selling one's stock for $24.70-ish would be 30c lower than what almost everybody else received for their shares last fall, but about 30c more than one would get in a squeeze out.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
