KAF Seagroatt-Campbell: Risk Arbitrage or Reverse Risk Arbitrage?

KAF Seagroatt & Campbell Bhd (KAF) (Stock Code 5096) listed on Bursa Malaysia has an impending corporate action where 76.74% of the listed entity shares will be acquired by KAF Investment Bank Berhad (KAF IB). Upon completion of the share sale agreement with KAF IB fully owning 76.74% of KAF shares, a mandatory general offer (MGO) will be triggered which gives other KAF shareholders an option to sell back your shares to KAF IB at a price of RM2.70 per share.

Based on the current ask price of RM2.51 per share (where shares can be bought immediately from a willing seller/sellers), there is a potential risk arbitrage gains of 7.5% in less than a year. However, this is subject to share sale conditions being fulfilled which will result in KAF IB gaining ownership of 76.74% equity interest in KAF.

As at 22 February 2016, the share sale conditions have not been fulfilled, after several announcement to extend the period of fulfillment of the conditions, hence delaying the trigger of MGO. On 22 Feb 2016 itself, a 3^rd announcement was made to Bursa that the period for fulfillment will be extended for another 3 months (90 days). The discount between the share price and MGO offer price has also widened since the announcement of the offer, hence giving market onlookers looking for risk arbitrage a chance of profit should they be confident in their assessment of the conditions successfully fulfilled and paving way for an MGO.

The final hurdles (share sale conditions) going against the deal may be the regulator’s stamp of approval, namely Bank Negara approval for KAFIB to purchase a securities broker KAF and Securities Commission approval on any change in shareholdings in the listed entity KAF. Should these 2 conditions fail to pass, there may be temporary roadblock to the MGO.

Final thoughts:

Pros: Potential attractive risk arbitrage returns of 7.5% in less than a year.

Cons: Continued delay in fulfillment of share sale conditions, lockup of excess cash in this risk arbitrage deal, total cancellation of share sale agreement and MGO, resulting in share price plunge below current levels.

Note: This is not an investment advice. Buy and sell any securities at your own risk.

Disclosure: None.

Side note: The continued delay highlights one of the key risks for those looking to profit through risk arbitrages deals involving listed securities. Excess cash may be lock up for longer than expected periods, or you may be forced to cut loss for a better investment opportunity. For those looking to spice up their returns using share margin financing, your interest cost on borrowed funds will be ticking up as the days and months goes by, hence reducing the profit margins.