Thursday, September 21, 2006

Aegis Communications (AGIS): Profitable arbitrage opportunity

Aegis Communications is currently trading at .044 . Its majority shareholder, World Focus, has offered to take the company private at .05 a share, offering a 8.8% after-tax return and naturally sparking my interest. So, as in all arbitrage opportunities, we turn to analyzing the risks and the rewards.

How likely is it that the deal will go through? There are currently 3 main risks inherit in this deal. First, shareholders have the right to protest and demand a fairer value for their share. Second, there is the possibility that World Focus will cancel the deal. Third, and final(and probably the greatest risk), There is approximately 30,000 preferred shares that need to consent approval of the merger, but the company cannot track down the holders and instead is seeking to bypass this step through Delaware courts.

The first risk is unlikely to lead to any problems. World Focus offered a 66% premium to the prior price and they used very generous multiples when coming up with the final price. Also, the only way this risk can bear fruit is if someone protests to the Delaware court of Chancellery. There is no common shareholder vote approval needed.

It is also very unlikely that World Focus will cancel the deal. World Focus currently owns 94.7% of Aegis' stock. To complete the transaction, they have to only use another 3.7 million. Given that World Focus is a subsidiary of the Essar Group, a 15 billion market cap indian company, it is unlikely that the price of the deal will have any funding problems. By taking the company private, they will also be able to eliminate $500,000 in audit and Sarbanes Oxley fees, and the managers can remain focused on the business. Thus, the means and incentive seem to be in place for World Focus to want to complete this deal.

The third risk is the one that could bring about the most problems. The company requires approval from the Series B shareholders in order to complete the deal. As World Focus was unable to locate these shareholders, they decided at the time of filing to go ahead and seek approval through the Delaware Court of Chancellery unless they could be located beforehand. There are several reasons the Series B shareholders will seek out the company though and approve the deal. Prior to this announcement, the Series B preferredholders were recieving no dividends on their shares as a result of one of Aegis's recent debt agreements. World Focus is offering to buy them out at face value plus accrued and unpaid dividends. This allows the holders to cash out with a nice profit on an otherwise risky and unprofitable investment.

BUT, even if the holders cant be located, World Focus has said they have bypassed approval before through the courts and they expect this to be closed by October 30.

*The author has a position in Aegis Communications. All information provided is believed to be reliable and presented for information purposes only.

That is one month and 9 days from now. Assuming it takes longer to complete and also to recieve the payment from your broker, we will assume a scenario of 2 months. That provides a 52% annualized gain, and there is no limit on the amount of shares you can own - unless you buy up all the 3 million in float. For smaller investors, and myself included, this offers a compelling return opportunity and the incentives are in place for the deal to go through.

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