Blackboard (BBBB) – Arbitrage Opportunity

reminiscences of a stock operator pdf

By Whopper Investments

I initiated a position in Blackboard (BBBB) today. The stock is getting acquired for $45 per share and is currently trading under $41. The deal has already been announced, and there’s almost no risk of shareholders voting the deal down. The company opened its books to multiple financial and strategic acquirers. Multiple parties made prelim offers. The lowest range of a prelim offer was a strategic company offering to acquire them for $41.5; outside of that, the lowest offer for a financial firm offering $44 on the low end and most offers were in the $45 to $48 range, plus one prelim offer at $50.

The acquirer, Providence, has an array of companies they consider strategic fits with Blackboard in their portfolio, which will likely have synergies with BBBB (of course, synergies may be the most dangerous word in acquisitions!!!).

The stock was trading around $37.50 before the company announced they were looking to sell themselves. Most arbs consider the downside for a failed merher to be about the price the company was trading at pre-merger levels. Of course, given this market, the downside is likely substantially lower. However, I don’t think the merger is likely to fall through. Like I said, Providence believes they have some synergies with Blackboard. More importantly than that, there’s the break up fee of $106m plus $5m in expenses if the merger falls through. Given the deal is valued at $1.64 billion, the break up fee comes out to just under 7% of the purchase price… not the highest fee in history, but still substantial.

At today’s price of $40.69, the company is trading at a spread of over 10.5%. The deal’s supposed to close within the fourth quarter of this year. Assuming the deal closes on 12/31/2011, the annualized return is just a shade under 41%.

Now, I’ve never considered myself exactly a merger arbitrage expert. And there are certainly more undervalued stocks given the degree of the recent sell off. But I like it for a portion of my portfolio right now. All merger arb stocks are getting crushed by margin calls and forced selling. The risk of this deal falling through seems incredibly low to me.

One last note- Warren Buffett kept a portion of his portfolio in workouts like this when he ran his partnership, and it allowed him to outperform the markets during down times. Stocks are cheap now, but that doesn’t mean they can’t get cheaper. Given the high annualized returns and the defined nature of the returns in what could be an incredibly rocky market, I think it makes a lot of sense.

Disclosure: Long BBBB

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1 Comment on "Blackboard (BBBB) – Arbitrage Opportunity"

  1. the spread is wide because bank of america is the lead bank on the financing package, and high yield spreads have blown out (loans and bonds). yes, there is a commitment letter with language stronger than in 2008, and it will be partially syndicated, but with BAC stock tanking people are skeptical of their desire to fund those loans (not that they can’t, but rather that they might try to get out of it in court and just pay the termination fee for the PE buyer). the other banks on the deal are not in great shape either. if you think this isn’t a risk, you might as well buy KCI too

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