The ADRs of Allied Irish Banks (OTCQB:AIBYY) are nearing the end of a long, strange trip. Until April 2012 AIBYY was a normal ADR, with each ADR representing ownership of 10 underlying shares of Allied Irish Banks (IRE:AIB). These underlying shares were held by the depositary bank, BNY Mellon.
But on April 10, 2012, following the collapse of AIB and its nationalization by the Irish government, AIB terminated the depositary agreement. Termination requires the depositary to sell the underlying shares and return the net cash proceeds to ADR holders in exchange for their ADRs - a process called redemption. Termination is unusual but not unheard of, and redemption is usually quick and orderly.
In the case of AIBYY, however, redemption has been anything but quick. Because the depositary owned a quarter of the float, it was reluctant to sell shares quickly, which it feared would collapse the price. Instead, the depositary metered its sales out slowly, over a period of more than 2 years.
The market was oblivious to these ongoing sales, and the market's oblivion led to mispricing. In May I argued that the market price of the ADRs exceeded by almost 40% the likely value of the shares and cash at the depositary. Alpha Vulture agreed that the ADRs were overvalued, but estimated the excess at 23%. We both shorted the ADRs, as did a number of readers. The short has worked out nicely; the ADRs have declined 26% since my article.
Nevertheless the ADRs are still overpriced, and the time to rectify the mispricing is running out. On Tuesday the depositary announced that it had finally finished selling the underlying shares and would redeem the ADRs this Friday (August 15, 2014). The net redemption price, after deduction of a 5 cent depositary fee, will be $1.22 - not far from the $1.19 that I forecast in May.
This announcement has not fully impacted the ADRs' price. On Tuesday AIBYY closed at $1.28 and on Wednesday it closed at $1.28 again. Buyers were paying $1.28 on Wednesday for the right to receive $1.22 on Friday. They must not know.
If you own AIBYY, you should sell it now. Even if you own only 1,000 shares and pay as much as a $50 commission, you'll clear more by selling than you would if you waited for Friday's redemption.
If you don't own AIBYY, you can still short, hoping that the price will fall toward $1.22 before you are forced to return the borrowed shares. The potential profits are small but the holding period is very short.
Disclosure: The author is short AIBYY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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