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Kansas City Life: Going Private Arbitrage

|Includes: Kansas City Life Insurance Company (KCLI)

Last Thursday, Kansas City Life Insurance (NASDAQ:KCLI) announced it would be putting forth a proposal to essentially take the company private, with the goal of reducing the number of shareholders to under 300 to avoid the burdensome reporting requirements under the Exchange Act. To do this, the company proposes to complete a 1-for-250 reverse split immediately followed by a 250-for-1 split, with any shareholder holding less than 250 shares at time of the reverse split receiving $52.50 per share in cash (instead of receiving a fractional share). The stock currently trades at ~$47 and the vote on the proposal is scheduled for December 17, 2015. A proxy hasn't been filed yet, but will be soon according to the 8-K filed last week.

For anyone who is familiar with the odd-lot tender strategy, the arbitrage should be obvious. For those of you who aren't, the arbitrage opportunity is to purchase 249 shares (or less) and have your shares cashed out at $52.50 upon the reverse split taking effect. At today's closing price of $47.10, the current spread offers upside of ~$1300 (equal to ~10% IRR and ~30% annualized return).

Stock Price

$47.10

Tender Price

$52.50

Shares

249

Gross Profit

$1,344.6

What I like about this trade is, unlike a merger, there aren't any financing or regulatory risks. The only comprehensible risk is that the deal doesn't occur because of an unsuccessful vote (or the board deciding to pull the offer). I view this risk as remote and one worth taking for the potential return.

But, if the deal did "break", the downside likely isn't that far below today's stock price. The stock traded at $42 pre-announcement, which is probably near the downside level. The company currently trades at 0.7X book value and generally trades below its peers. The insurance industry is also experiencing some mild consolidation, likely helping to limit the downside.

Disclosure: I am/we are long KCLI.