Arbitrage Opportunity

Image Entertainment
Just bought 1000 shares of Image Entertainment (DISK) at $1.10/share as a speculative arbitrage opportunity.

As a speculative play, the details about their business isn't too important to me since I'm only attempting to capitalize on the difference in the stock price now compared to the buyout price. What do I mean?

According to a definitive merger agreement in January:
On November 17, 2008, our board of directors approved, and on November 20, 2008, we entered into, a merger agreement providing for the acquisition of Image by Nyx Acquisitions, Inc., a Delaware corporation, or Nyx. If the merger is completed, you will be entitled to receive $2.75 per share in cash, without interest, for all of the shares of our common stock that you own at the time of the merger.

What is important to me are the chances of this merger actually happening.

The current stock price would indicate that most investors probably don't think this merger will ever come to fruition, and there's good reason for their skepticism. Nyx Acquisitions, Inc. has already extended the closing date of the merger a few times and investors are worried that Nyx won't be able to swing the financing or that they may back out of the deal.

But, I think differently.

With each extension of the merger closing date, Nyx is basically required to pay an ever-increasing, and non-refundable, extension cost to Image referred to as a "business interruption fee". After news today of another reported extension, the amount of extension money Nyx has paid to Image now totals $4 million.

I bought DISK because I believe NYX wouldn't just walk away from such a large deposit if they weren't truly intending to buyout Image. It's difficult finding financing at this time, but not impossible. The merger date may be postponed again, but I think that that it's a done deal sometime in the near future.

Of course it's all speculative, but when it happens, I should more than double my investment in this arbitrage opportunity. If it doesn't happen, Image Entertainment, Inc. would be "sitting pretty" with a free cash infusion of at least $4 million.


Guzzo said...

Another good short-term arb play for a small, but pretty certain, gain would be En Pointe Technologies (ENPT).

Guzzo said...

Well, it looks like we DON'T have a merger. According to Yahoo! Finance:

CHATSWORTH, Calif.--(BUSINESS WIRE)--Image Entertainment, Inc. (NASDAQ:DISK - News), a leading independent licensee, producer and distributor of home entertainment programming in North America, announced today that it has notified Nyx Acquisitions, Inc., an affiliate of Q-Black, LLC, that due to Nyx’s failure to pay an additional $1.0 million to Image as required by the merger agreement, Image Entertainment has terminated the merger agreement.

Jeff Framer, President of Image Entertainment, said, “Despite Image’s willingness to close the merger, Nyx was unable to finance the transaction.
This is the risk one takes with trying to play an arbitrage opportunity.

If it's any consolation, I've made money in the past from deals that fell through. But, it won't happen today. Let's see what happens.

Guzzo said...

It looks like a lot of arb players bailed out Friday afternoon, but I'm still holding.

I think it was a smart move for Image to nix (pun intended) the merger agreement. No one is mentioning that Image walked away from the deal with $2.5 million in cash, for free!

Because the deal was called off, arbs have cut their losses and moved on to other opportunities. Ironically, the stock is now trading at $0.89 per share even though the company is in a better position than it was before the merger agreement.

No big deal IMO. There's no law that says Image can't enter into another agreement, and perhaps with someone who can come up with the financing.

Guzzo said...

Well, I took a gamble and lost. DISK defaulted on it's loans today and it looks to me like BK is just down the road.

Sold my entire position a few minutes ago at $0.26/share for a loss of about $850.00.