Description
Idea: Short ODSY at $26.25. The borrow is quite easy.
Catalyst: Failure by Gentiva to secure funding to close the merger deal.
Risk: In the next few weeks (while the high yield market is open) if Gentiva can get the loan, then the stock moves higher toward the deal price of $27.00. So lets say, $26.65? There would still be some premium left for time value of money (1.31%). So you cover, and lose $0.40.
Reward: If the deal falls through, reasonable to assume that ODSY falls to pre-deal price in the low $20s. You make, $6.00+.
Risk/Reward Ratio: 15 to 1.
Even if you give the deal a 90% probability of closing, the expected value is still $0.24 per share.
I'm not going to go into the background of the what the companies do. You can read about that elsewhere.
Background: Gentiva had entered into a merger agreement with ODSY to purchase it for $27.00 per share in CASH. They are looking to borrow $1.2B. Gentiva has a $650mm market cap today.
On July 22nd, the WSJ reported that Gentiva loan was pushed back. Committments for the term loan B from CLOs were due and no buyers showed up. The banks behind the loan could have taken the loans on their books, but instead they said no. They are going to try and sell the CLO again. If this fails, the odds are quite high the funding will not be met and the merger will fail.
I think the odds of having someone else come over the top and acquire ODSY are very low. Other companies in the same space are seeing their stocks get crushed. Look at AMED.
Last week, Gentiva said it had received a notice from the SEC requiring it to preserve documents, an indication it could be included in an investigation into whether health-care companies pushed patients into extra home-healthcare visits to secure more in reimbursements from a government program. This is keeping some buyers of the debt on the sidelines until this gets resolved.
Transaction Assumptions
- Transaction date: 9/30/10
- Offer price: $27
- Premium to ODSY price (5/21/10): 40%
- Primary shares out: 34.2
- Plus Options outstanding: 1.5
- Diluted shares out: 35.7
- Transaction Value $962.7
- Plus ODSY Total Debt (3/31) $113.6
- Less ODSY Cash (3/31): ($141.9)
- Plus One time Transaction Expenses (including $1.5m bridge fee) $48.6
- Plus: Financing Fees $27.7
- Total Transaction Value: $1010.7
Catalyst
Catalyst: Failure by Gentiva to secure funding to close the merger deal within the next 2 weeks.