AdvanSource Biomaterials Corp. (OTC: ASNB) – An Attractive Microcap Arbitrage Opportunity With Limited Risk
17 Jan 2020
Quote: $0.18/share
AdvanSource Biomaterials designs and manufacturers materials used in medical applications. They primarily make polyurethane materials that are used in long and short-term implants and disposable products (plastics). The business has been around for 20 years but neither the history of the business nor what they do make much difference to the investment case.
On November 25, 2019, AdvanSource announced that they had entered into an agreement to sell all of their assets to a subsidiary of Mitsubishi Chemical Corporation for $7.25 million in cash- which AdvanSource stated should translate into approximately $0.20/share. If the deal closes and management’s calculations prove to be accurate, it will provide an absolute return of ~11% (or higher if you can get in below $0.18/share). The company expects the transaction to close in Q1 2020. This is not a long holding period and obviously produces a much higher annualized return. (https://www.otcmarkets.com/stock/ASNB/news/AdvanSource-Biomaterials-Corporation-Enters-Into-a-Definitive-Agreement-to-Sell-Substantially-All-of-Its-Assets-to-a-Sub?id=247497)
I stay away from most arbitrage situation. However, I like this one for a few reasons:
- It provides a 10%+ return on an absolute basis (most arbitrage situations I read about provide a low absolute return, but the author is always promoting the high figure on an annualized basis).
- It’s a nice “tuck-in” acquisition of a tiny company by a much larger corporation and therefore, has much lower (virtually none) risks of government intervention due to antitrust laws in the US or abroad, push-back from acquirer shareholders, etc.
- It has already been unanimously approved by the Board and insiders own ~30% of shares outstanding. The company’s largest shareholder is the CEO who owns ~13%.
What’s the downside?
On January 21, 2020 (this coming Tuesday), shareholders will vote on the deal (only shareholders of record Dec. 10, 2019 can vote). Prior to the deal announcement, the stock was trading at around $0.12/share (33% lower than current price) and if for some reason the deal is not approved, it’s likely it will trade lower. On a valuation basis, paying the current price of $0.18/share is paying a ~6x EBIT (based on their last 10Q from Sept. 30 2019 and using TTM numbers) but please note these figures are cherry picked and 2019 was their most profitable year in the last several.
Why does the opportunity exist?
Most arbitrage opportunities have smaller spreads. I think the ASNB spread exists for two reasons.
1) the average daily volume is only $8,800 (however, the last three days the volume has been much higher- 24K, 16K, 51K, so there is some variability) and so it is only suitable for small, private investors.
2) Related to reason #1, this is an OTC stock that trades for less than a quarter and has very few eyes on it. It’s extremely unknown and undiscovered compared to most deals.
Disclosure: I own shares of ASNB…
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