China Nepstar Going Private Is An Arbitrageur’s Dream

China Nepstar Chain Drugstore

On March. 16, 2016, China Nepstar (NYSE: NPD) announced it had entered into a definitive merger agreement for a going private transaction. The deal requires 66.6% of the shareholder votes to go through, and 79.5% of the shares have already been committed. The vote being the only material step to closing, the merger spread of ~5.3% is a steal.

Less than a week following the first post identifying an arbitrage opportunity in a Chinese going-private transaction, doubles down and adds China Nepstar Chain Drugstore to the buy list.

The story goes the same way – A Chinese company having listed in the US a few years back is now taking advantage to buy back its public float in order to go back to the flexibility and lower compliance costs of the private life.

Still no regulatory approvals required – no antitrust concerns in this kind of going-private transaction.

Financing has been obtained – a local lender has committed to finance the transaction in full.

The vote is a non-event – 66.6% of the votes present at the meeting are required to be in favor of the deal; however, the buyer group initiating the transaction owns 79.5% of the shares (and of the voting power) and there is no majority of the minority clause (part of the perks of being incorporated under the laws of the Cayman Islands).

Attractive return – the offer is for US$2.62/share of China Nepstar Chain Drugstore, with a current price of US$2.44/share at time of writing. However, the company discloses that up to US$0.05/share will be deducted as cancellation fees of the ADS shares (the vehicle allowing to list them on the NYSE). Assuming a net consideration of US$2.57/share, the potential return is ~5.3%. While the vote and exact closing dates haven’t been communicated yet, the merger prospectus does mention that the hard deadline for the transaction to close is August 2016. However, the chance that a closing happens prior to that date is high given the straightforward situation at hand.

While risk 0 does not exist, this merger is as close as it can get from it in terms of arbitrage risk. Sure, like in any other transaction, parties involved could decide to call it off (and pay the associated break-up fees), but the base assumption when it comes to merger arbitrage is that the companies involved will follow through, barring any external factor outside of their control. After all, a merger agreement is a legal contract that’s supposed to be enforced. China Nepstar Chain Drugstore’s going private is therefore an ideal candidate for merger arbitrage, with the possibility to use some leverage to take advantage of the high certainty of closing. Check the current status of this transaction and others by looking at the portfolio.

Disclosure: Long China Nepstar Chain Drugstore.

This article expresses an opinion and the author does not receive compensation for it and has no business relationship with any company whose stock is mentioned in this article; do your own due diligence before making investment decisions.

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