We got the initial idea here from Clark Street Value
Its a merger and liquidation of a nano cap bank stock with a favorable risk/reward.
On April 30th, the acquirer, a credit union called America Family, announced they have completed the deal to acquire BFFI and proceed with the liquidation, expected to take about 120 days. Shareholders can expect to receive somewhere between $10.21 and $10.41 in cash versus a current price of BFFI of $9.95.
Assuming a midpoint of $10.31, and 150 days until payout (9/30), it works out to a 3.62% Holding Period Return. (10.31/9.95 = 3.62%). This annualizes to 8.80%. I think that’s really compelling, especially given the high degree of certainty, an uncertain stock market and the paltry returns available in cash alternatives.
I think the true odds here are closer to Treasuries +/- some consideration for illiquidity and risk that liquidation proceeds come in different than the buyer projected. If T-bills are .15 basis points over a comparable 150 days, I think I should earn maybe .15 + .50 for illiquidity + another .50 for liquidation uncertainty or 1.15% (2.80% annualized).
Another way to look at it is as a money line wager. The deal is virtually certain (the transaction has closed), so the only real risks are around timing and the magnitude of the payout. I’m going to assume that the timing and the $10.21 to $10.41 range given by American Family is fairly accurate. Under those assumptions, I think true odds here of receiving something in the range and within the guided timeframe are more like 98 or 99%, which would deserve a 1-2% return. That makes a fair price for BFFI more like $10.10.
Summing it up, I think I’m getting a high return, low risk but illiquid short-term cash substitute, not unlike a CD. I particularly like the high degree of certainty, reasonable time until resolution and projected returns of 6.60% – 11.39% annualized, especially relative to the current stock market. I should get a nice payout for for holding for a few months.