Last week, Al Mazaya announced that they are going to buy the remaining stocks of two companies, First Dubai and Waterfront Real Estate Co.. Mazaya owns more than 60% and 70% of each company respectively. First Dubai is publicly traded, while Waterfront is not. Stockholders of each company have the option to either sell to Mazaya or keep their stocks. If a stockholder does actually decide to sell, they have to pledge the money to Mazaya’s capital increase. In practice every shareholder will get a certain pre-assigned number of Mazaya stock for their First Dubai or Waterfront stocks. The ratio amounts to 1 Mazaya stock for every 2.75 First Dubai shares and 4 Waterfront shares.
According to Tuesday’s closing price, Mazaya is trading at 118 fils, while First Dubai is trading at 37 fils. This presents a great “Merger Arbitrage” trade opportunity. Since every 2.75 First Dubai share equals to 1 Mazaya share, then the market is valuing Mazaya at 101.75 fils (37 fils x 2.75) a 16% discount. So in theory either First Dubai is trading cheaply or Mazaya is expensive.
This presents an opportunity to short Mazaya and use the proceeds to buy First Dubai, and once the merger is completed, use the Mazaya stocks you get and repay your short position, with the remainder Mazaya stock considered as profit or “Free Money”.
Here is an example of how the trade goes:
1) Borrow 1,000,000 shares of Mazaya and sell them in the market, generating KD 118,000 (1,000,000 shares x 118 fils per share).
2) Use the proceeds (KD 118,000) to buy First Dubai shares, which amount to 3,189,189 shares.
3) After the merger is completed, your shares in First Dubai will exchanged to 1,159,705 shares of Mazaya.
4) Give back the 1,000,000 shares in Mazaya that you shorted + interest, and you will be left with 159,705 shares of Mazaya – interest as profit, without actually using your money.
However there exists, as always, risks and difficulties with exercising such trade:
1) If the merger does not go through, then you will be stuck with the trade. Personally I do think that the deal will go through as Mazaya owns a majority of First Dubai, and would not risk further hurting their reputation unless they are sure the deal will do through.
2) It is very difficult to short in Kuwait, not impossible. You have to get into contact with a person, mutual fund, or investment company that owns Mazaya stock and are planning on keeping their holdings in that stock for the long-term. You would offer them interest to borrow their shares.
3) As with shorting, there is unlimited downside risk. The trade can go side-ways if Mazaya’s share price starts to go up and First Dubai goes down, and the deal does not go through. The proceeds from selling First Dubai will not be enough to re-buy the shorted Mazaya position, leaving you with the need to inject more money and if you don’t have that money, then you’re bankrupt.
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Loading ...Tags: First Dubai, Kuwait, Mazaya, Merge, Merger, Merger Arbitrage, Real Estate, Waterfront Real Estate
lol, in the first half of the read you made it look so easy.. classic merger arb, short the acquirer and long the acquired. I’m not sure if going naked is the right way to do it, especially in Kuwait. My bet is that once the merger is announced everyone is going to start pilling on Mazaya lol
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Actual deal(s) rather like moving deckchairs on the Titanic. Mazaya is what it is.
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mazaya from the same people that gave us global
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[...] week, I wrote about an Merger Arbitrage trade opportunity. The trade involved Mazaya and First Dubai as they are planning on merging together. The trade was [...]