Merger Arb Opportunity in Fieldstone

Jul.10.07 | About: (FICC)

As I write this, the last trade for Fieldstone Investment Corp (FICC) was at $3.82. FICC is a mortgage banking company suffering from the subprime explosion. It is in the process of being acquired by Credit-Based Asset Servicing and Securitization LLC for $4.00 cash per share.

On July 2nd, 2007 the company announced "that they have received conditional approval from the State of New York of the merger of Fieldstone and a subsidiary of C-BASS and are working to obtain New York's final approval. Fieldstone and C-BASS have received all other regulatory and third party consents required under the merger agreement and expect to close the merger in mid-July 2007 under the terms of the merger agreement." [emphasis added]

Buying FICC at $3.82 and selling it at $4.00 is a return of 4.71% -- not much until you consider that you can see that return in a few days. Today is the 9th of the month and management is expecting the deal to close around the 15th of the month, so if it's smooth sailing, the annualized return here will be astronomical.

The risk you take is that the merger does not close and you are left holding the shares of a down and out company. Bulls will say that these shares are priced at discount of ~40% to book value, so there is a margin of safety. Bears will say that book value may not be indicative of intrinsic value, and should the merger fail the stock is likely to get crushed further.

My guess is that the merger will go through, although I do not own FICC at this time. I am not comfortable accepting the less likely but potentially huge downside risk for the sake of earning the more likely but limited upside return. If I change my mind, I will note so in the comments section.