Until recently, the GeoEye merger, which combines the two satellite imaging companies, has traded at a spread of about $1.30, or 4%, because of an extended antitrust review by the Department of Justice. The DOJ cleared the merger on Jan. 9 and it is now expected to close Jan. 31. GeoEye shares have in recent days been trading at a premium to the full prorated terms of the deal. Short covering could account, in part, for the negative spread, but some arbs may be betting that the prorate for the deal will lean in their favor.
Under the terms of the merger agreement, GeoEye shareholders have the right to elect either 1.137 shares of DigitalGlobe and $4.10 per share in cash -- which is the mixed 50-50 proration of the deal consideration -- or $20.27 in cash, or the full stock pay out of 1.425 of a DigitalGlobe share for each GeoEye share. The merger consideration is capped so that DigitalGlobe will pay only 26.1 million in shares and $94 million in cash to get the deal done.
Financing for the deal was lined up earlier this week.
But DigitalGlobe shares have been on a run since the merger was announced last July. At that time, DigitalGlobe traded in a range of about $15 to $18 per share. The stock Thursday, Jan. 24, tickled $29.
GeoEye shareholders have until Jan. 29 to elect a form of consideration. The move upward in DigitalGlobe shares has created a disparity between the value of the cash consideration -- $20.27 -- and the stock consideration -- $41.30 per GeoEye share.
As a consequence, while it makes economic sense to opt for the stock consideration, some shareholders will inevitably not make an election that will bend the proration in the favor of those who elect to receive stock. The lighter the stock election, the more shares will be allotted to those who elect stock and the proration will tilt off a 50-50 split in favor of more stock and less cash.
A minimum of 5% of shareholders likely will not elect any consideration, which would benefit stock electors. But the terms of the merger agreement allow nonelectors to be deemed to have taken a mixed consideration. That will temper the increased stock given to those who elect stock after the proration is worked out. Still, given the disparity between the cash and stock values in the deal as the election date nears a little tick could translate into an unexpected "spread."
Jeremy C. Stein, a former member of the Board of Governors of the Federal Reserve System, will consult hedge fund BlueMountain Capital Management LLC. For other updates launch today's Movers & shakers slideshow.
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