March 12, 2019 - 6:12pm EST by
2019 2020
Price: 17.16 EPS 0.90 0.90
Shares Out. (in M): 27 P/E 19 19
Market Cap (in $M): 457 P/FCF -81.9 -81.9
Net Debt (in $M): 1,432 EBIT 45 45
TEV ($): 505 TEV/EBIT 11 11
Borrow Cost: General Collateral

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This is a simple short term (3 days) low risk trading idea with a binary outcome that is based on this week's expected court ruling on the termination fee owed in the Rent-a-Center (RCII) Vintage Capital meger.  I propose shorting B Riley (RILY) and going long the RCII March puts above 15 which expire Friday.  If the Delaware Chancery rules in the favor of B Riley/Vintage Capital then RCII will trade at or below the $15 merger price.  If the judge rules in RCII's favor then RILY will be on the hook for its guarantee of the $126.5 million break up fee.  Vintage has a merger subsidiary that is also on the hook for the fee, but it is unclear to me how much Vintage has contributed to this single purpose entity.  I believe that RILY shares would probably move about 15% in either direction with the outcome, though it is possible that RILY's stock might have more significant downside since the potential liabiltiy dwarfs the money to be made from financing the transaction.

I would short RILY in the proportion of the cost of the RCII put purchase.  For example, if you buy $2,500 worth of puts (167 RCII March 15 $17 strike price puts at $0.15), then I would short 1,000 shares of Riley (15% potential decline x $17.16 = $2,500).  This should provide an outcome of zero dollars of loss if the Chancery rules in RCII's favor.  If it goes in RILY's favor then you have a potential gain of $30,895 on the puts (167 puts x {$2.00 intinsic value -$0.15 cost}) less the loss on the RCII short which I believe will be around 15% or $2,500 for a net gain of $28,495.  You can play this also by shorting RCII, but I feel that this creates more variablity of outcomes.  You can short a number of different RCII March options to add more dollars to the amount invested

I believe that it is likely that RILY wins the favor of the Chancery and that you can achieve a very high short term return on this trade.  There is a Law360 article on this that you can read if you have a membership or get a 1 week trial subscription.  https://www.law360.com/trials/articles/1137305/chancery-says-127m-rent-a-center-breakup-fee-unlikely-  

Here is the language from RILY's recently filed 10-K on this issue:

Recent Developments


On June 17, 2018, B. Riley Financial, Inc. (the “Company” or “B. Riley”) entered into certain agreements pursuant to which B. Riley agreed to provide certain debt and equity funding and other support in connection with the acquisition (the “Acquisition”) by Vintage Rodeo Parent, LLC (the “Vintage Parent”), of Rent-A-Center, Inc. (“Rent-A-Center”), contemplated by that certain merger agreement dated as of June 17, 2018, by and among Vintage Parent, Vintage Rodeo Acquisition, Inc. a wholly owned subsidiary of Vintage Parent (the “Merger Sub” or the “Borrower”), and Rent-A-Center (the “Merger Agreement”).


In connection therewith, B. Riley and Vintage RTO, L.P., an affiliate of Vintage Parent (“Vintage Merger Guarantor”), entered into a Limited Guarantee dated as of June 17, 2018 (the “Limited Guarantee”), in favor of Rent-A-Center, pursuant to which B. Riley and Vintage Merger Guarantor (together, the “Merger Guarantors”) agreed to guarantee, jointly and severally, to Rent-A-Center the payment, performance and discharge of all of the liabilities and obligations of Vintage Parent and Merger Sub under the Merger Agreement when required in accordance with the Merger Agreement (the “Guaranteed Obligations”), including without limitation, (i) termination fees in the amount of $126.5 million due to Rent-A-Center if the Merger Agreement is properly terminated (the “Termination Fee”); and (ii) reimbursement and indemnification obligations when required (collectively, the “Guarantee Obligations”), provided, that the liability under the Limited Guarantee shall not exceed $128.5 million.


In connection with the execution of the Limited Guarantee, the Company entered into a Mutual Indemnity/Contribution Agreement, dated as of June 17, 2018 (the “Mutual Indemnity Agreement”), with the Vintage Merger Guarantor and Samjor Family, LP (collectively, the “Vintage Indemnity Parties”). Under the Mutual Indemnity Agreement, the Vintage Guarantors agreed, jointly and severally, to indemnify and hold harmless B. Riley and its affiliates from damages and liabilities arising out of the Guarantee Obligations, other than those caused B. Riley’s failure to fund under their debt or equity commitments.


On December 18, 2018, Rent-A-Center purported to terminate the Merger Agreement because the end date of the agreement was allegedly not extended prior to December 17, 2018 by Vintage Parent. Rent-A-Center delivered notice of such termination to Vintage Parent, and notified Vintage Parent of its obligation under the terms of the Merger Agreement to pay Rent-A-Center the Termination Fee within three business days.


On December 18, 2018, Vintage Capital Management, LLC, an affiliate of Vintage Parent (“Vintage Capital”), delivered a letter to Rent-A-Center stating that Rent-A-Center’s purported termination of the Merger Agreement is invalid, that it believes the Merger Agreement remains in effect.  On December 21, 2018, Vintage Capital filed a complaint in the Court of Chancery of the State of Delaware (the “Court”) challenging Rent-A-Center’s purported termination of the Merger Agreement and demand for payment of the Termination Fee. The relief sought by Vintage Capital includes declaratory judgements that the Merger Agreement has not been terminated and remains in full force and effect, that Rent-A-Center has breached its obligations under the Merger Agreement and is not excused from failing to comply with its obligations thereunder and that the Termination Fee is an unenforceable penalty.


On December 28, 2018, Rent-A-Center provided each of B. Riley and the Vintage Merger Guarantors with a written request under the Limited Guarantee (a “Performance Demand”), to promptly, and in any event within ten (10) Business Days, pay to Rent-A-Center the Guaranteed Obligations (including the Termination Fee) in full.


On December 30, 2018, B. Riley filed a motion in the Court to intervene in the above referenced case filed by Vintage Capital pursuant to which B. Riley is seeking declaratory judgments, among other things, that the parties agreed to extend the End Date under the Merger Agreement and that Rent-A-Center is estopped from terminating the Merger Agreement, that Rent-A-Center has breached the Merger Agreement and its obligations of good faith and fair dealing in connection with consummating the Merger, and that the Termination Fee is an unenforceable penalty. B. Riley is also seeking an award of costs and reasonable attorneys’ fees and such other further relief as the Court finds equitable and appropriate.


At a hearing held on December 31, 2018, the Court stated that it would grant a temporary restraining order to preserve the status quo, which order would prohibit Rent-A-Center from engaging in certain transactions pending an expedited trial on the merits. On January 3, 2019, the Court granted B. Riley’s motion to intervene in the Vintage Capital case and on January 7, 2019, the Court granted a temporary restraining order restricting Rent-A-Center from engaging in certain transactions prior to the trial on the merits scheduled for February 11, 2019.  On February 11th and 12th, a trial was held in Delaware, post-trial briefs were filed on February 22, 2019 and March 1, 2019. A post-trial hearing has been scheduled for March 11, 2019. The Company believes that it is reasonably possible that the Court will rule in favor of the Performance Demand. The amount of possible loss is not estimable; however, the range of loss could be from $0 to $128.5 million.




I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Ruling by the Chancery of Delaware in the termination fee suit between RCII and RILY/Vintage.  The Chancery has indicated it will rule on this issue this week.  If there is a delay, then the options are worthless with RCII at $21.56.

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