Attractive Under-The-Radar Merger Arbitrage Opportunity

| About: Baylake Corp (BYLK)
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Summary

Baylake Corp. and Nicolet Bankshares have agreed to merge.

The companies are small community banks, and this opportunity has thus not hit the radar for many investors.

The transaction has received the necessary regulatory approvals.

This is a short write-up as the value proposition here is simple and straight forward. The opportunity is most suitable for advanced individual investors as well as smaller fund managers/RIAs due to the market cap of the target firms and the float.

During September of last year, Baylake Corp. (NASDAQ:BYLK) and Nicolet Bankshares (NASDAQ:NCBS) - two small Wisconsin-based community banks - agreed to combine in a merger, increasing their footprint in the area.

Under the merger agreement, each Baylake shareholder will receive 0.4517 shares of Nicolet for each share of their Baylake stock (note that Baylake will undergo a reverse split 4,517:10,000 around April 16 so that this ratio will change to 1:1 at that time).

Baylake currently trades at around $16.09, with Nicolet's shares at $38.10, resulting in a spread of $1.12, or around 7%. That might not seem like an extraordinary amount or enough to bother with, however, the transaction, when first announced, was expected to close in the first half of 2016, making this an annualized return of some 31%. Moreover, the banks have received the necessary regulatory approvals, which are typically one of the biggest hurdles in mergers, especially those pertaining to banks, or where anti-trust issues may arise. The only necessary approval remaining is shareholder approval, which we believe should be a formality. The special shareholders' meetings are scheduled for April 12th.

To make things even better, Baylake announced a special dividend of $0.40/share payable on April 25th to shareholders of record on April 18th, thus increasing the spread to $1.52/share, or 9.45%. Another nugget of information contained in the April 1st press release was an updated closing date. To quote the release, "assuming receipt of the requisite shareholder approvals and satisfaction of the remaining customary closing conditions, a closing date of April 29, 2016 is being targeted."

If the April 29 closing date is realized, the 9.45% return from shorting 0.4517 shares of Nicolet for each share of Baylake long works out to an annualized return of a whopping 200%, making this a very attractive opportunity from a risk-return point of view.

Disclosure: I am/we are long BYLK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.