Reach Energy: Potential Risk Arbitrage?

Reach Energy (Stock Code 5256) listed on Bursa Malaysia is a Special Purpose Acquisition Company (SPAC). In short, SPAC is a shell company, where funds are being raised from public shareholders via IPO and they are required to identify eligible companies (oil and gas sector companies for the case of Reach) for acquisition within 3 years from date of listing. The funds raised are placed in an interest bearing Trust account.

Reach Energy was listed on 15 August 2014, and it has about 1 year and 6 months left for identifying a target for acquisition. Should it fail to acquire any business as defined in the Prospectus, the funds raised will be returned to shareholders. In the event cash is to be returned in full to shareholders at the end of the 3 year timeframe, shareholders stand to receive a minimum amount of RM0.71 cash per share or up to a maximum (more or less depending on the interest rate and related expenses) of RM0.775 cash per share, assuming cash placed in the Trust account deposit has a interest of 3% p.a. Moreover, shareholders can choose to vote against any acquisition and full cash will be refunded to the shareholder, irregardless of the acquisition deal going through if the majority supports the acquisition.

There are 2 scenarios as explained below in which Reach could be a potential risk arbitrage play with decent annualised return (after brokerage expenses):

Scenario 1: Reach fails to acquire any qualified business. Cash is duly returned at the end of the 3 year timeframe (expected to be August 2017). Should you enter Reach now (19 Feb 2016) at RM0.655 per share, you stand to receive RM0.71 to RM0.775 per share, which gives you an effective return of 8.4% to 18.4% in 1.5 years.

Scenario 2: Reach tables a qualifying acquisition and you vote against the Resolution. Assuming EGM is called at exactly the end of the 3 year timeframe, should you enter Reach now (19 Feb 2016) at RM0.655 per share, you stand to receive RM0.71 to RM0.775 per share, which gives you an effective return of 8.4% to 18.4% in 1.5 years. The returns would vary depending on the final cash balance in the Trust Account. A minimum return of 8.4%is conservatively estimated.

Should you choose to vote in favour for the acquisition, Reach Energy shares in your hands will no longer be a valid risk arbitrage play.

Final thoughts:

Pros: Decent minimum high single digit annual returns on excess cash in hand.

Cons: Lockup of excess cash, delay of qualifying acquisition to beyond the 3 year timeframe, Lower than expected returns of 8.4% in 1.5 years.

Further information regarding Reach and SPAC in general could be found at: http://reachenergy.listedcompany.com/spac.html

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

Disclosure: None.