This idea is short and sweet.  It will probably be most valued by those members of VIC that occasionally participate in risk arb deals and have a stomach for illiquid stocks.  For those of you managing Madoff sized money, you might want to look elsewhere.  Smith Investment Company is a non-reporting issuer controlled by the Smith family, which trades under the symbol SMIC.PK.  This is the same Smith family behind AO Smith, symbol AOS.  SMIC is closely held and thinly traded.  SMIC owns a roughly 30% interest in AOS, which they have historically accounted for using the equity method.  It might not matter, but A O Smith Corporation engages in the manufacture and sale of water heating equipment and electric motors for residential, commercial, and industrial end markets.  

 

 

SMIC and AOS recently announced that they have signed a definative merger agreement.  Stockholders of SMIC will receive 2.396 shares of A.O. Smith class a common stock and .463 shares of A.O. Smith common stock.  The class a is the super voting stock, which converts to the common stock that trades on the NYSE. 

 

2.396 plus .463 = 2.83260.

 

2.8360 times 28.09  (last on AOS) = 79.56

 

The last price on SMIC was 72.25.  So today it closed at a spread of 7.31.  But earlier in the morning the spread was 10 plus.

 

But thats not all!  For those of you that act quickly, not only will you get the 7.31 credit, but shareholders of record as of December 22, 2008 also get a spin off in a newly formed company by the name of Smith Investment Company LLC.  These will be the assets and liabilities of SMICs operating businesses.  This is a hodgepodge of crummy little businesses that might have a book value of about 10$ per share.  I imagine it will trade for anywhere between 1$ and 4$ after the spinoff, assuming that a market for the shares materialize on the pink sheets.  The operating businesses have always been a drag on SMIC's shares.  The businesses are spread around between multicolor printing, warehousing, trucking and packaging.  SMICLLC will be nothing to write home about, but your getting it for a credit, so who cares.

 

After the spinoff SMIC will consist entirely of AOS stock.  The merger is expected to close in April of 2009.  So it should give you some time to build a modest position.

 

The one risk, is that the merger needs the IRS' blessing.  But SMIC management seems to have exhibited an abundance of caution in pursuing this merger.   I imagine they have been told it is not an issue by their tax counsel.