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.
