Yesterday Helix BioMedix, Inc. filed a Rule 13e-3 Transaction Statement on Schedule 13e-3. At a special meeting of stockholders, the record holders will vote on approval of an amendment to the Certificate of Incorporation to effect a 1-for-300 reverse stock split. www.sec.gov/Archives/edgar/data/831749/000143774912009319/hbm_sch13e3-090612.htm
The 13e-3 or "going private" risk arb is one of my favorite trades. The purpose of the HXBM reverse split is to enable the company to suspend periodic reporting obligations. By reducing the stockholders of record to fewer than 500, the company is allowed to "go private" pursuant to rule 12h-3 of the Exchange Act. The anticipated cost savings from preparing and filing reports with the SEC, ongoing expenses for compliance with Sarbanes-Oxley and expected cost savings from Dodd-Frank are estimated to be $350,000 per year. The company will also not be required to make public certain proprietary or sensitive information and the transaction will allow the company to focus on long-term growth without emphasis on short-term quarterly results.
As a result of the 1-for-300 reverse split:
each share of stock held of record by a cashed out holder immediately prior to the effective time of the split will be converted into the right to receive $.60 in cash per pre-split share;and
holders of at least one share after the reverse split will continue as shareholders.
All holders of fewer than 300 shares will be cashed out at $.60 per share and holders of over 300 pre-split shares will continue as equity holders. The shares are currently $.24-$.30. On August 16, 2012 a fairness opinion by Cascadia Capital, LLC considers the $.60 cash-out to be fair to stockholders.
Smart traders realize that owning 299 pre split shares will maximize profit. You can see from the attached time & sales from LiveVol Pro that many people established 299 share positions on this announcement yesterday.
So where are the risks? Most information regarding the split can be found in the PRE14a on the SEC website. www.sec.gov/Archives/edgar/data/831749/000143774912009318/hbm_pre14a-090612.htm When I look at a 13e-3 trade I have a several concerns:
How are street name shareholders treated? In some cases to participate in the split you must be a holder of record. It is HXBMs desire to treat holders of fewer than 300 shares in street name through a nominee in the same manner as a holder registered in their name.
How will the company pay for the cash-out? HXBM expects the split to cost $300,000 and will be paid out of current cash. I confirmed the current cash holdings on the recent Form 10k filing.
When is the vote? Are there any large holders? The special meeting date has not been set yet. HXBM has two large holders. Frank and David Nickell hold a combined 52% of shares. The approval of the split requires a majority vote. My guess would be that this large holder is in favor. Executives and directors who intend to vote in favor make up an additional 9% of the shares.
The largest risk I have found in these deals is that new holders purchase 299 shares and expect to be cashed out. The company has the right to cancel the deal if the cost of cash-out increases significantly. This rarely happens but I always look at the past trading range for my downside. In this case approx $.20 has been the low over the past several years and the fairness opinion of $.60 makes me comfortable with a .20-.25 entry price.
A $.25 purchase and $.60 cash-out price makes for a nice trading profit as a percentage but is only a small profit. You can increase profit by executing the trade in multiple accounts. I have done many of these deals with profits ranging from $50 to $2000. The HXBM deal is a small but great trade to learn from. The easiest way to find the setups is by searching 13e3 on the sec.gov website.
I am currently long 299 share blocks across multiple accounts.
Disclosure: I am long OTCPK:HXBM.