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Potential merger arbitrage situation - how would options be adjusted?


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Edit: The hope was that the options would be adjusted such that they had as the new deliverable cash and notes consideration instead of stock. If that were the case then all of the options would be significantly overvalued as they would be tied to a fixed value instead of to a volatile stock. From the SEC filing of the actual merger agreement, it looks like the default election will be to receive stock consideration. From similar deals I found, it looks like the options are adjusted to whatever the shareholders who do not make an election receive, which in this case will be stock, so the arbitrage deal I had hoped for would not work. 


This morning there was a reverse merger announced this morning by SEAC to bring Triller public at a $5 billion valuation. SEAC is a tiny company with about 50 million shares outstanding and was valued as little as .65 before this deal and a little under $3 now. It's looking like there are some nice arbitrage opportunities with the options on the company if I am reading the terms of the deal correctly. With a bigger deal I'd assume I'm missing something, but I can easily see this just not being on people's radar and there could be a very good opportunity here. As a SEAC shareholder you could either get (roughly) $0.50 in cash and $1.50 principal in convertible notes, or all stock at a 20% discount to the conversion price of the convertible notes. If all stockholders elected to receive stock, they would own 2.3% of the $5 billion company, or about $115 million implied value total which is about $2.30 per share.


The two interesting ways I see to play it are:


1. Shorting call options way above the merger price, so say July $5 calls are selling for about 0.70 each. Obviously anything could happen in the short-term with the price so being naked short the calls is risky, but if you can hold through a big move it should work out well.


2. Shorting put options at or below the merger consideration. The July $2 puts can be sold for about .80 so you would risk 1.20 if the combined deal went to zero. Either way the merger consideration should be $2.00 or higher, so that's a very high premium to receive for an option that should go to zero.


I'm inclined to want to short the puts as I can do it in bigger size without taking any infinite risk.  However, one thing I am not clear about are how would short options that are still outstanding be adjusted when the deal closes? I've never been involved in a merger quite like this. I've had ones where there is cash consideration only and then the option is adjusted to be equal to the amount of cash that would be received and the options are accelerated so they go away shortly after the merger closes. I've also had ones that are all stock or cash and stock, in which case the options are adjusted to reference the new stock in the quantity you would have received as a shareholder in the company. Here the shareholder have to choose one of two options for consideration, and an outstanding stock option couldn't reference both at the same time. Would the long option holder get to choose on the merger date which way the option would go? If so, I'm assuming they would choose the stock alternative you would rather have a put on stock that can go down over a basket of cash and notes which is likely to stay at face value.


Here are the actual the terms of the deal:



Pursuant and subject to the terms and conditions of the Merger Agreement, in addition to other contemplated transactions, (i) the parties anticipate that TrillerVerz will conduct an offering of convertible notes prior to the closing in an amount in excess of $100 million (the “Company Convertible Notes”), and (ii) the charter of the surviving company will provide for two classes of common stock, consisting of Class A common stock (“Buyer Class A Common Stock”) and Class B common stock (which Class B common stock is anticipated to provide for super-voting rights to provide its holders 76% or more of the total voting rights) (“Buyer Class B Common Stock”).


The stockholders of SeaChange will have the right to elect to receive either (i) their pro rata portion of $25 million cash consideration along with their pro rata portion of an aggregate $75 million in principal of notes (the “Notes Consideration”) to be issued by the surviving company to the holders of SeaChange common stock (such cash and notes consideration, the “Cash/Notes Consideration”) or (ii) a number of shares of Buyer Class A Common Stock (the “Stock Consideration”), in an amount equal to that which such holder would have received if such holder had purchased Company Convertible Notes in an aggregate amount equal to its pro rata portion of the Cash/Notes Consideration and then converted such Company Convertible Notes at the conversion price at which such Company Convertible Notes were issued and then participated pro-rata along with the TrillerVerz holders in the proposed Business Combination. Assuming that (i) all holders of SeaChange common stock elect the Stock Consideration and (ii) that TrillerVerz issues $250 million of Company Convertible Notes which convert in connection with the proposed Business Combination at an agreed discount of 20% to an assumed $5 billion TrillerVerz valuation, the stockholders of SeaChange would own approximately 2.3% of the surviving company and the holders of TrillerVerz would hold approximately 97.7% of the surviving company. If all stockholders of SeaChange elected to receive the Cash/Notes Consideration, such stockholders would have no equity interest in the surviving company, and the Triller holders would collectively own 100% of the surviving company. For SeaChange stockholders that elect the Cash/Notes Consideration, each would receive their pro rata portion of such Cash/Notes Consideration which would then also reduce the resulting SeaChange stockholders’ ownership percentages by taking into account the payment of the Cash/Notes Consideration and related reduction in the Stock Consideration. The notes (the “Merger Consideration Notes”) to be issued to SeaChange stockholders who elect the Cash/Notes Consideration are payable on the one-year anniversary of issuance, bear interest at a rate of 5% per annum and, in the event an agreed fairness opinion is obtained by SeaChange in accordance with the provisions of the Merger Agreement, will be automatically converted by the surviving company into Buyer Class A Common Stock at such time as the market capitalization of the surviving company equals or exceeds $6 billion for ten consecutive trading days into 80% of the same number of shares of Buyer Class A Common Stock which the SeaChange stockholder would have received if instead of electing the Cash/Notes Consideration such SeaChange stockholder had elected the Stock Consideration for the portion of the Cash/Notes Consideration attributable to the principal amount of the Notes Consideration. If the fairness opinion is not obtained, the Merger Consideration Notes will not be automatically convertible, but in any case, the holders of the Merger Consideration Notes will have the option to convert into Buyer Class A Common Stock if the surviving company exercises its optional redemption right, which it may do at any time, in whole or in part, on the same terms set forth above. The holders of the Merger Consideration Notes will have recourse against the surviving company and its assets only to the extent of the surviving company’s interest in certain of its subsidiaries (who will also provide guarantees of the Merger Consideration Notes). The existing subsidiaries of SeaChange prior to the proposed Merger are also anticipated to provide a first lien security interest on their assets securing the Merger Consideration Notes. The Merger Consideration Notes will have limited covenants.


Edited by aws
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