South Street Financial Corp (SSFC) - Buyout Arbitrage

Thanks to Michael Guzzo for pointing out a good arbitrage opportunity on his blog. The arb is on a tiny bank South Street Financial Corp (SSFC). The company has recently announced it's plan to delist in order to cut costs. That doesn't really interest me too much. What I did find interesting was that (as pounted out by Mike) in their announcement they have indicated that shareholder of less than 750 shares will be converted to preferred shares on a 1 to1 basis. The preferred shares can then be converted for $10 per share each. Currently the stocks are trading in the low $9 range, offering a decent arb return should your account be small enough to benefit within the 750 share limit. In my opinion, it is this 750 share limit which is keeping the share price down as the usual special situation players, hedge funds, probably couldn't be bothered with this one. In fact, most instiutional holders would be motivated to sell due to the delisting and subsequent absence of reporting.

Where it gets a bit dicey is the date of the transaction and whether or not it will go through. Apparently there will be a special shareholder meeting in March, during which the delisting move will be voted on. At this point, I really don't have a very good feel for how long it will actually take to delist. On top of that, it is unclear whether or not the vote will go through.

In spite of these concerns, I am going to add SSFC to my own portfolio but won't be tracking it on the blog since it is such a small gain. In my opinion, the vote will probably go through as presumably management has talked to some of their larger shareholders about the deal. If the vote fails, well SSFC was pretty much trading in this range before the announcement so I see little downside. I am hoping that the transaction can be concluded in 3-6 months after the vote but that is pure speculation on my part. The company pays out a dividend of $.10 per share per quarter, so I will be getting over 4% while I wait. Considering that I bought my shares today at $9.08, I should get a 10.1% capital gain plus the dividends. I consider this an attractive and relatively safe arbitrage.

Disclaimer

Do your own research on this and all securites mentioned on this blog. I am in no way recommending or endorsing this or any securities discussed on this blog. All information on this blog is purely my opinion.

Update

I have been thinking quite a bit about the timing for the repurchase of the preferred shares. What I have concluded is that this would probably need to coincide with the application for delisting but could actually take place (this is speculative on my part) before all the actual paperwork goes through. The key component seems to be that the company has fewer than 300 shareholders to get delisted. It would seem then, that in order to reduce the number of shareholders the conversion to preferred shares would take place first.

In other words, it is my opinion that I will be able to exit out of this position a little earlier than I originally anticipated. If the vote goes through, then perhaps 1-3 months would be more accurate. At any rate, this is looking like a better and better play the more I dig into it.

A couple of references:

General information on going private. The article mentions the 300 shareholder limit and a 3-week wait for delisting. Deregistration takes a bit longer, the SEC has 90 days to approve this. In the case of SSFC preferred shares, I do not believe it is an issue as the preferred shares should be issued prior to de-registration.

A press release from Bennet Environmental which is filing to delist from the Amex. The press release was issued on Nov 22, requesting delisting take place on December 14.