Odd Lot Arbitrage Opportunity in XBiotech Shares
Odd lot arbitrage is what we call special situations where we can buy up to 99 shares on the open market and tender them for a profit. These situations aren't risk free, but have a high probability of success and tend to offer high internal rates of return. The downside is that you can only invest a small amount of capital in each deal. No one's getting rich with these, but they are a fun way to run up a small account or cover expenses in a larger one.
Right now there's an odd lot arbitrage opportunity in shares of XBiotech (NASDAQ:XBIT).
On December 7, 2019 Janssen Biotech acquired the rights to XBiotech's True Human Antibody bermekimab for $750 million. The transaction closed on December 30th. On January 14th, XBiotech filed Form SC TO-I to announce that they will conduct a modified dutch auction to repurchase $420 million worth of shares between $30 and $33 per share.
The purchase price range is notably higher than the stock's price just before the announcement ($30 vs $19). The chart below shows that the stock has doubled since the Janssen transaction was announced.
Source: Yahoo Finance
Why would management set the minimum buyback price at $30 when the stock was below $19? If they wanted to maximize the number of shares repurchased, they could have set the range in the low $20s. The answer — management wants to use this as their personal payday.
Form SC TO-I explains that managers and directors plan to tender a combined 11 million shares. XBiotech can repurchase at most 14 million shares ($420 million divided by $30 per share), so this deal will almost certainly be oversubscribed.
The threat of proration explains why XBiotech continues to trade below the minimum tender price. If you buy shares today at $23 and tender at $30, only a fraction of your shares are likely to be accepted. After the tender, the stock may fall back to its pre-deal range below $19 per share. Thus, the market price ($23) is implying that only 36% of shares tendered at $30 will be accepted (if the market price reverts to $19 after the deal).
However, you can avoid proration because this deal offers an odd lot priority. An odd lot is 99 shares or fewer. An odd lot priority means that the company will repurchase all odd lots validity tendered first. Per the fine print, you'll need to own 99 or fewer shares and tender 100% of your shares (e.g. owning 98 and tender 98 is okay, owning 100 and tendering 99 is not okay, owning 98 and tendering 97 is not okay).
So, the trade is to buy 99 shares at $23 and tender them all at $30. The offer expires at 5:00 p.m., New York City time, on Wednesday, February 12, 2020. If everything goes according to plan, you'll make $693 on $2,277 of capital, or 30%.
The risk is that the deal falls through or is modified. Both are unlikely, given that XBiotech has the cash on hand needed and management plans to use the deal as a personal pay day.
Disclosure: The author, Eagle Point Capital, or their affiliates may own the securities discussed. This blog is for informational purposes only. Nothing should be construed as investment advice. Please read our Terms and Conditions for further details.