I first mentioned JAKK a couple of months ago as an interesting value situation. Since that time, the company has commenced a tender offer for ~16% of shares outstanding at $20 per share, as well as signing a due diligence agreement w/ Oaktree (who turned up the pressure on JAKK in mid-April)
So the company still certainly looks interesting. It wouldn’t surprise at all to see them sell themselves in the mid-high $20s within the next few months, as they certainly appear to be in play.
However, that’s not the purpose of this post. The tender offer presents a very interesting opportunity to make a relatively risk free, high ROI investment in a tight time frame, albeit on a limited amount of capital. (PS- the first place that I think posted this idea was Motiwala Capital here).
JAKK’s tender offer calls for an odd-lot provision that shareholders with 99 or less shares will automatically have their full tender accepted. The tender goes through on June 27th and is for $20 per share. With shares closing under $18.50 per share as I write this (June 3rd), that represents a very solid ROI. I use etrade, which charges $5 per share and $30 for a tender, representing an additional $0.35 in fees.
Add it all up, and you’re buying 99 shares at $18.85 per share (or less) to get $20 in just 25 days. The offer isn’t subject to any financing conditions, JAKK has plenty of cash on hand to cover the payment, and Oaktree is likely to keep the heat on so the odds of the tender not going through seem low. So let’s say there’s a 5% chance the offer doesn’t go through and JAKK returns to its pre-offer price of $17.00 per share.
We have a 95% chance of a $1.15 gain, and a 5% chance of a $1.50 loss. Thus our expected return is $1.0175. On a $18.50 investment, that represents a 5.5% return. Annualized, that’s way over a 100% return.
Now, you might quibble with my assumptions. CSInvesting uses much more conservative assumptions (too conservative, IMO) and still finds over 15% annualized returns. Point is, this is a pretty attractive opportunity to put a small bit of money to work and make excellent returns.
One last point- it doesn’t matter when you make the investment. As a matter of fact, your returns will be better if you make it closer to the tender deadline. The arbitrage tends to get more attractive on down days, so if you plug the numbers into your own assumptions and the ROI isn’t quite at your benchmark, it may make sense to keep track of the share price and consider investing on a big down day.
Disclosure- Long JAKK
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