Description
RTW Inc. a Minneapolis workers' compensation insurer is going to be aquired by American Physicians Capital Inc.(ACAP), a national provider of medical professional liability coverage and workers' compensation. ACAP announced that it has agreed to acquire RTW, Inc. American Physicians will pay about $32 million for RTW, or $3.10 for each of RTW's 10.3 million shares outstanding. American Physicians expects to complete the acquisition by early 2002.
RTWI is currently trading at 2.54:
-resulting in a .56 gain. Looking at the history of arbitrage plays, roughly 90% of the deals have gone through after the announcement date, while 10% have fallen through. Taking this 9:1 ratio into account we can determine an annualized return. If the deal comes to fruition in 6 months, an investor would gain 56 cents per share. There is a 90% chance of this occuring. On the flip side, if the deal falls apart the stock should go back down to what it was prior to the announcement. The day before the announcement, RTWI was trading at $1.30. So there is a 10% chance that an investor would lose $1.24. The equation for the annualized return is as follows:
(90% x 56 cents) - (10% x $1.24) / .5(or 6 months)x 2.54= 33.6%
This is 33.6% annualized return adjusting for the risk involved.
What Are The Potential Risks/Assurances That The Deal Will Flop/Close?
1. Possible Regulatory Problems:
-When looking at insurance deals, regulatory problems are hardly ever an issue, especially when the target is a small cap company and when the deal is valued at only $32 million.
2. Problems Financing the Deal:
-ACAP should have no problem financing the deal. The deal is valued at $32 million cash and ACAP has $107 million cash in the bank and zero debt.
3. Problems of Shareholder Approval:
-I've spoken to the CFO of RTWI who said that there haven't been any notable shareholders who are against the aquisition. And why should they, they will receive a 138% premium from the stock's closing price prior to the announcement.
Positives:
-This is an all cash deal
-ACAP has a very strong balance sheet
-RTWI investors seem ok with the deal
So Why has the Spread Remained so High?
I suppose that is such since small hedge funds and the like can't take part in such a small takeover, but I'm open for ideas.
Catalyst
Arbitrage