walt373 (99.86)

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Hollywood Media Corp (HOLL) tender offer

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February 14, 2011 – Comments (1) | RELATED TICKERS: HOLL

This is a short term trade idea for Hollywood Media Corp. (HOLL). The
company is doing a tender offer for about 25% of its shares
outstanding for $2.05. The offer expires on February 18. Currently,
shares are trading at $1.94, or about 5.6% under the tender price. It
usually takes a week after the offer expires to get your cash, so 5.6%
in two weeks is a very high annualized return. However, the actual
return will probably be less, since the amount of shares you tender
will probably be prorated.

http://www.hollywoodmedia.com/press_releases/press_release_2011_02_03...

There is no odd-lot provision with this tender offer, so it's likely
you will not be able to tender all of your shares, since usually these
offers are oversubscribed and the number of shares tendered per person
is prorated. Even so, I think there is a good chance of making money,
as the % of shares being bought is high.

For reference, CPRT was another recent tender offer with a high % of
shares being bought, about 15%. The proration factor for the offer was
60%. The stock actually rose 5% on the day after the offer expired,
which was unusual. Normally tender offer stocks will fall by 1-2%
percent. I actually lost money shorting the stock because of that...

http://www.businesswire.com/news/home/20110124005421/en/Copart-Announ...

For the HOLL trade, the return will depend on the proration factor and
the performance of the shares on the day after the trade (if you want
to exit your position then). Comparing HOLL to CPRT, HOLL has a higher
% of shares being tendered, which should increase the proration
factor. But the spread is also larger, which should decrease the
proration factor. If you assume they are a wash, leading to the same
60% proration factor, the stock needs to fall by more than 8.4% on the
day after the offer expires for you to lose money.

Alternatively, for a lower-risk play, you can buy the stock at 1.94,
and sell it on Feb 18 without participating in the tender offer. I
think it's likely the spread will close slightly by then. But if not,
then you can just do the tender offer.

Finally, one more piece of information: the tender offer was
originally going to be for $2.00, but for a larger number of shares, 9
million. They changed it to $2.05 for 8 million shares a few weeks
later. Not exactly sure why they would do that, but I'm guessing that
they were afraid that they would not get enough shares tendered at the
original price of $2.00, so they wanted to sweeten the deal. Why else
would they pay more money? This leads me to believe the proration
factor for the offer should be decent.

1 Comments – Post Your Own

#1) On February 23, 2011 at 2:02 AM, walt373 (99.86) wrote:

Just making an update on the HOLL deal. Bad news, the proration factor ended up being a lot less than I thought it would be, at 33.1%. It looks like about 77% of all shares outstanding were tendered, which is more than I expected. This was almost a worst-case scenario for the proration factor, which would be 25%, assuming 100% of shares were tendered. As expected, HOLL stock fell following the deal, down 8% at one point today and closing down 5% at $1.85. Today's big overall drop in the market probably did not help. Thankfully, the overall deal ended up with only a small loss (if you want to lock in the current price), of about 1%, assuming you opened a position at $1.94. It's also possible the deal will end with a profit or a larger loss, since we don't get our untendered shares returned to us until next week. But if you want to, you can lock in the current price by shorting the stock and making your net exposure zero.

As a side note, I think an interesting trade idea is shorting the stock right before a tender offer expires. As I mentioned in my first email, sometimes this trade backfires, like it did with CPRT, but it seems like it works most of the time.

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