Matt Franz : Zealous For Knowledge

CBS – Entercom Exchange Offer

Disclosure: I own shares of CBS.

CBS is spinning off its radio business in a Reverse Morris Trust transaction with Entercom (ETM). The spinoff is going to be accomplished via voluntary tender. To incentivize shareholders to tender their CBS shares, shareholders will receive $1.08 of Entercom stock for every $1.00 of CBS stock tendered and accepted.

These transactions are typically oversubscribed, which means investors will be prorated. However, there is an important exception. Shareholders who tender 99 shares or fewer ( an “odd lot”) will not be subject to proration.

Right now you could buy 99 shares of CBS, which, at $56.75 will cost you $5,618. You can tender these shares and expect to receive $6,067 worth of Entercom stock when the transaction closes (11/16/17). That’s a quick $450 profit.

But this is definitely not free money. First, the transaction is subject to an upper exchange limit. If the ratio of CBS’s stock price to Entercom’s stock price is greater thanĀ 5.7466, you will receive less than $1.08 per dollar tendered. CBS’s stock could also drop more than 8% between now and when you receive shares of Entercom, negating the profit. Finally, Entercom stock could fall after the transaction closes but before you can sell it and lock in your profit. Stock prices could of course also fluctuate in your favor, but I wouldn’t bet on it.

You could reduce some of this risk by short selling Entercom stock. That way, when you get your Entercom stock it nets out against your short position and you are flat. The primary risk here would be that the exchange offer hits the upper limit and you don’t get the full amount of Entercom stock you expected, leaving you with a net short position.

The exchange ratio will be finalized on November 14th. CBS set up a website with all of the details of the offer and a live calculation of the exchange ratio. You could wait until November 14th, ensure the ratio is below the upper limit, and then buy and tender 99 CBS shares.

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