Merger Arbitrage Mondays: Chicken Soup for the Soul Acquires Redbox At A Massive Discount

Summary

  • Eight new deals announced last week.
  • Chicken Soup acquires Redbox in a 'take-under' at a massive discount.
  • Following Elon Musk's tweet last week, stating that the Twitter deal is temporarily on hold, Twitter shares fell as low as $40.01 on Friday, May 13, 2022.
  • Looking for more investing ideas like this one? Get them exclusively at Inside Arbitrage. Learn More »

Redbox rental location

William Howard/iStock Editorial via Getty Images

Most M&A observers had expected U.S. deal activity to moderate or drop sharply this year, but it feels like things are heating up with large acquisitions like Microsoft's (MSFT) acquisition of Activision Blizzard (ATVI) or Elon Musk's acquisition of Twitter (TWTR). More than half of the 45 deals announced since the start of the year have been bigger than a billion dollars in size and 13 deals were larger than $10 billion. Aggregate total deals announced this year are now approaching $300 billion. Maybe this is the last hurrah before the tide goes out. Merger activity increased significantly last week with eight new deals announced and two deals completed. Three of the eight new deals announced last week were potential deals in the works.

Redbox Entertainment (RDBX)

An interesting deal announced last week was the acquisition of Redbox Entertainment by Chicken Soup for the Soul Entertainment (NASDAQ:CSSE). In over a decade of tracking Merger Arbitrage deals, we have never come across a 'take under' at such a massive discount. Redbox was trading at $5.60 before the deal was announced. Under the terms of the agreement, Chicken Soup will acquire Redbox in an all-stock deal at a fixed exchange ratio of 0.087 of a share of class A common stock of Chicken Soup per Redbox share, representing a discount of 82%. Based on CSSE's current price of $5.48, the deal price works out to less than 48 cents per share of Redbox. I read the merger agreement twice to make sure I was not missing something. The 0.087 per share exchange ratio does not appear to be a typo.

Redbox Entertainment, a video rental company known for its bright red kiosks, is another victim of digital media and distribution. The company went public in October 2021 through a SPAC merger with Seaport Global Acquisition. The company posted a string of losses after going public and Redbox's post-SPAC shares declined from $10 to below $2 recently, as you can see from the chart below. Operating losses and a growing debt load probably left the company with few options but to accept this take under offer from CSSE.

Redbox 1 Year Price Chart

Redbox 1 Year Price Chart (InsideArbitrage)

Twitter (TWTR)

The fiasco at Redbox pales in comparison with what is going on with the acquisition of Twitter. Following Elon Musk's tweet last week, stating that the Twitter deal is temporarily on hold, Twitter shares fell as low as $40.01 on Friday, May 13 before recovering a little to close at $40.72. At Friday's closing price, the spread on the deal expanded to 33.10% or 52.52% annualized if the deal closes by the end of the year. We wrote last month that the $54.20 price Musk was offering was fair for the company. I've been a Twitter shareholder for several years but the spread on the deal did not convince me to add more to my position. Musk, responding to his tweet about putting the deal on hold, mentioned that he is still committed to the acquisition.

Tweet by Elon Musk

Tweet by Elon Musk (Twitter)

This sudden interest in doing further due diligence about the number of bots on Twitter is surprising considering Elon had on many occasions openly talked about 'fixing the bots'. Tesla's (TSLA) stock has been under pressure and is down 23% since the deal was announced. If the stock were to fall further, it could impact the margin loan portion of the financing for Twitter and the banks might require Elon to post more collateral. This latest twist could be a ploy to get Twitter's Board of Directors back to the negotiating table and accept a lower offer the way Bernard Arnault, LVMH's billionaire CEO, managed to negotiate the Tiffany's deal down from $135 per share to $131.50 per share (a $400 million discount). LVMH had attempted to walk away from that deal citing the pandemic's impact on Tiffany's sales but Tiffany sued LVMH to compel them to complete the merger. I certainly hope that Twitter's Board of Directors does not cave into pressure to negotiate the deal lower. Walking away from this deal is going to be very difficult for Elon and Twitter could sue him to make him perform.

Tweet by Elon Musk

Tweet by Elon Musk (Twitter)

Tweet by Elon Musk

Tweet by Elon Musk (Twitter)

SPAC Arbitrage

There were four new SPAC IPOs filed and two new SPAC combinations announced last week.

  1. On May 9, 2022, Grindr entered into a definitive agreement to merge with Tiga Acquisition (TINV).
  2. On May 10, 2022, ProSomnus Holdings, a company that develops medical devices for the treatment of obstructive sleep apnea, and Lakeshore Acquisition I Corp. (LAAA) entered into a definitive business combination agreement.
  3. On May 11, 2022, Getaround and InterPrivate II Acquisition Corp. (IPVA) entered into a definitive business combination agreement that will result in Getaround becoming a public company upon completion of the transaction.
  4. On May 12, 2022, Amprius Technologies and Kensington Capital Acquisition Corp. IV (KCAC) announced a definitive agreement for a business combination that would result in Amprius becoming a publicly-listed company.

Weekly Spread Changes:

The table below shows weekly spread changes between May 7 and May 13, 2022.

Symbol Quote Acquiring Company Acquiring Company Quote Current Spread Last Week Spread Spread Change Weekly Deal Type
(TWTR) 40.72 Elon Musk (N/A) 33.10% 8.84% 24.26% All Cash
(CDR) 25.23 Wheeler Real Estate Investment Trust, Inc. (WHLR) 2.045 14.94% 2.95% 11.99% All Cash
(SJR) 26.86 Rogers Communications Inc. (RCI) 49.77 20.63% 11.11% 9.52% Special Conditions
(MGI) 9.42 Madison Dearborn Partners, LLC (N/A) 16.77% 9.89% 6.88% All Cash
(SAVE) 16.98 Frontier Group Holdings, Inc. (ULCC) 8.72 10.76% 4.00% 6.76% Cash Plus Stock
(NP) 39.03 Schweitzer-Mauduit International, Inc. (SWM) 26.49 -7.83% -5.77% -2.06% All Stock
(MILE) 0.9996 Lemonade (LMND) 21.04 10.71% 14.06% -3.35% All Stock
(HTA) 29.15 Healthcare Realty Trust Incorporated (HR) 28.56 14.51% 19.40% -4.89% Cash Plus Stock
(EMCF) 35.7 Farmers National Banc Corp. (FMNB) 14.77 -11.05% -6.14% -4.91% All Stock
(TEN) 16.63 Apollo Global Management, Inc. (APO) 54.2 20.26% 27.63% -7.37% All Cash

Deal Statistics:

Total Number of Deals Closed in 2022 68
Total Number of Deals Not Completed in 2022 4
Total Number of Pending Deals
Cash Deals 56
Stock Deals 11
Stock & Cash Deals 10
Special Conditions 9
Total Number of Pending Deals 86
Aggregate Deal Consideration $841.16 billion

New Deals:

  1. The acquisition of ServiceSource International (SREV) by Concentrix Corporation (CNXC) for $164.49 million or $1.50 per share in cash.
  2. The acquisition of Hemisphere Media Group (HMTV) by a subsidiary of Gato Investments for $658.07 million or $7.00 per share in cash. We added HMTV as a potential deal to the Deals in the Works section on July 22, 2021, and the price after the news of the potential deal came out was $12.78.
  3. The acquisition of Points.com (PCOM) by Plusgrade Parent for $385 million or $25.00 per share in cash.
  4. The acquisition of Hailiang Education Group (HLG) by Hailiang Education International Limited for $368.89 million or $14.31 in cash without interest (the "Per ADS Merger Consideration"). We added HLG as a potential deal to the Deals in the Works section on December 23, 2021, and the price after the news of the potential deal came out was $12.21.
  5. The acquisition of Biohaven Pharmaceutical Holding Company (BHVN) by Pfizer (PFE) for $11.6 billion. Under the terms of the agreement, Pfizer will acquire all outstanding shares of Biohaven not already owned by Pfizer for $148.50 per share in cash. Biohaven common shareholders, including Pfizer, will also receive 0.5 of a share of New Biohaven, a new publicly traded company that will retain Biohaven's non-CGRP development stage pipeline compounds, per Biohaven common share.
  6. The acquisition of Switch (SWCH) by DigitalBridge Group (DBRG) for $11 billion or $34.25 per share in cash. We added SWCH as a potential deal to the Deals in the Works section on March 21, 2022, and the price after the news of the potential deal came out was $29.43.
  7. The acquisition of Trecora Resources (TREC) by an affiliate of Balmoral Funds for $247 million or $9.81 per share in cash.
  8. The acquisition of Redbox Entertainment (RDBX) by Chicken Soup for the Soul Entertainment for $182.9 million in an all stock deal. Under the terms of the agreement, Redbox stockholders will receive a fixed exchange ratio of 0.087 of a share of class A common stock of Chicken Soup for the Soul Entertainment per Redbox share.

Deal Updates:

  1. On May 9, 2022, the U.S. Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") with respect to the merger between Intersect ENT (XENT) and Medtronic (MDT). With early termination granted under the HSR Act, the transaction has now received all applicable antitrust regulatory approvals.
  2. On May 9, 2022, Terminix Global Holdings (TMX) announced it has entered into a definitive agreement to divest its pest management businesses in the U.K. and Norway. These businesses are being divested by Terminix as a condition to the closing of its pending merger with Rentokil Initial (OTCPK:RTOKY).
  3. May 10, 2022: Tenneco's (TEN) sale to Apollo Global (APO) has been filed under "simplified procedure" for China's antitrust review.
  4. On May 10, 2022, Oracle (ORCL) extended the expiration of the offer with respect to its merger with Cerner Corporation (CERN). The offer was previously scheduled to expire on May 11, 2022. The expiration date of the offer has been extended to June 6, 2022.
  5. On May 10, 2022, shareholders of South Jersey Industries (SJI) approved the company's merger with Infrastructure Investments Fund at a special meeting of shareholders.
  6. On May 11, 2022, TEGNA (TGNA) and Standard General received a request for additional information and documentary material from the DOJ in connection with the DOJ's review of the transaction.
  7. May 12, 2022: According to Reuters, Twitter (TWTR) CEO Parag Agrawal told his employees in a memo that two senior Twitter leaders who oversee the consumer and revenue divisions will depart the social media company.
  8. On May 13, 2022, Nielsen Holdings (NLSN) announced the expiration of the 45-day "go-shop" period under its previously announced definitive agreement to be acquired by a consortium of private investment funds.
  9. May 13, 2022: Elon Musk tweeted his intention to put the $44-billion deal for Twitter (TWTR) temporarily on hold.

Closed Deals:

  1. The acquisition of Intersect ENT by Medtronic on May 13, 2022. It took 280 days for this deal to be completed.
  2. The acquisition of Bottomline Technologies (EPAY) by Thoma Bravo on May 13, 2022. It took 147 days for this deal to be completed.

Top 10 Deals With Largest Spreads:

Please do your own due diligence on deals with large spreads. Some of these large spreads might be related to regulatory issues or because of the way the deal is structured. We classify some of these deals as "special situation" deals in our merger arbitrage tool and provide additional details to help with the analysis. There may be unique situations related to special dividends, spinoffs, proration, etc. that need to be accounted for when looking at these spreads.

Symbol Announced Date Acquiring Company Closing Price Last Price Closing Date Profit Annualized Profit
(TWTR) 04/25/2022 Elon Musk (N/A) $54.20 $40.72 12/31/2022 33.10% 52.76%
(TMX) 12/14/2021 Rentokil Initial plc (OTCPK:RTOKY) $55.00 $43.11 09/30/2022 27.58% 73.48%
(BLCT) 04/30/2022 Multelements Limited (N/A) $1.60 $1.26 12/31/2022 26.98% 43.01%
(ZNGA) 01/10/2022 Take-Two Interactive Software, Inc. (TTWO) $9.86 $7.91 05/23/2022 24.65% 1285.44%
(BKI) 05/04/2022 Intercontinental Exchange, Inc. (ICE) $85.00 $69.34 06/30/2023 22.58% 20.11%
(ATVI) 01/18/2022 Microsoft Corporation (MSFT) $95.00 $77.74 06/30/2023 22.20% 19.77%
(CHNG) 01/06/2021 UnitedHealth Group Incorporated (UNH) $27.75 $22.76 12/31/2022 21.92% 34.95%
(SJR) 03/15/2021 Rogers Communications Inc. (RCI) $32.40 $26.86 06/30/2022 20.63% 167.30%
(TEN) 02/23/2022 Apollo Global Management, Inc. (APO) $20.00 $16.63 12/31/2022 20.26% 32.30%
(SIMO) 05/05/2022 MaxLinear, Inc. (MXL) $109.55 $91.94 06/30/2023 19.15% 17.05%

Conclusion:

SPAC activity increased significantly last week with four new SPAC IPOs filed and four SPAC business combinations announced. We also saw an uptick in merger activity including two multi-billion dollar deals. Recent market turmoil has led to the widening of a large number of spreads and merger arbitrage provides for fertile hunting grounds at this time.

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This article was written by

Asif Suria profile picture
9.53K Followers
Comprehensive tools and detailed analysis for event-driven investors

I am an entrepreneur and investor with a focus on event driven strategies including merger arbitrage, spinoffs, (legal) insider trading, buybacks and SPACs. I was one of the earliest contributors on Seeking Alpha and started publishing here in 2005. For more than a decade I have been writing every week about M&A and interesting insider transactions. My work has been mentioned in Barron's, Dow Jones, BNN Bloomberg and other publications.  

I have been an active investor for more than two decades and my background in technology has helped me built tools that inform my investing process, especially as it relates to event-driven strategies that require updated data and processes. The focus on my Inside Arbitrage service is to provide investors with the right combination of tools and analysis to help them take advantage of strategies that can perform well across market cycles.  

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Disclosure: I/we have a beneficial long position in the shares of TWTR, FHN, TSEM, HTA, TGNA, BRG either through stock ownership, options, or other derivatives. 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.

Additional disclosure: Disclaimer: I have long positions in Twitter (TWTR), First Horizon (FHN), Tower Semiconductor (TSEM), Healthcare Trust of America (HTA), TEGNA (TGNA) and Bluerock Residential Growth REIT (BRG). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.

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