ARIA Arbitrage Opportunity.
9 Jan 2017, Takeda announced a definitive agreement to acquire all outstanding shares of ARIA in a transaction valued at approximately $5.2 billion. Under the terms of the agreement, the Company's shareholders will receive $24.00 in cash for each ARIA share they own.
19 Jan 2017, Kiku Merger Co., Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, a corporation organized under the laws of Japan issued a Schedule 14D-9 announcing a tender offer of $24.00 per share to buy Ariad Pharmaceutical (NASDAQ:ARIA).
The Offer and withdrawal rights will expire at 11:59 p.m. Eastern Time on Wednesday, February 15, 2017.
Below is a link to the SEC website of the Schedule 14D-9 describing the details of the transaction.
ARIA closed on 19 Jan 2017 at $23.70 per share and is trading today (20 Jan) around $23.76.
For an investor that has $25k available in his account, an Arbitrage opportunity exists by purchasing 1000 shares of ARIA today, (20 Jan) @ 23.76 per share and then selling the 1000 shares no later than 15 February @ no less than 23.98 per share. This scenario would yield a profit of $199.50 to the investor and would calculate to be an annualized return of at least 12.25%.
The above illustration makes the following assumptions:
1. 20 Jan: One purchases 1000 shares of ARIA @ $23.76 per share with a brokerage fee of no greater than $9.99. (Total cost = $23,769.99)
2. 15 Feb: One sells the 1000 shares of ARIA @ a minimum of $23.98 per share with a brokerage fee of no greater than $9.99 and a SEC Reg fee of no more than $0.52 (Total proceeds = $23,969.49)
If the investor does not have $25k immediately available, he can consider making the purchase on the margin (borrow the money from his broker). TD Ameritrade's current margin rate to borrow less than $25k is currently set at 9.00%.
How much profit would be left over if an investor made the above purchase with a margin rate of 9.00% and if so, what would be the profit and the risk associated with this trade?
Borrowing $23,769.99 at a margin rate of 9% for 26 days (20 Jan - 15 Feb) would cost the investor $155.44 of interest. That would reduce the profit to $45.06 which calculates to be an annualized return of 2.64%. A 2.64% annualized return may not be worth risk. An investor should be able to find a similar return for less risk.
The risk to the investor is that the deal may not close by the announced 15 February 2017 date. Which would lower the potential rate of return for the investor. In an arbitrage opportunity, the investor would prefer to exit the trade as early as possible once the profit has been made.
Several Law firms (Faruqi & Faruqi, Brower Piven, Harwood Feffer and Weiss Law) are all investigating possible breaches of fiduciary duty of ARIA's board of directors in connection with the proposed acquisition. This signals to me, there is a potential upside to the proposed offer $24.00 per share.
Disclosure: I am/we are long ARIA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.