Sunday, May 13, 2012

RSY XXXXVIII: 96% Premium, time to sell AVCA

Friday we learned that Covington Investments, LLC proposed an acquisition Advocat Inc. (AVCA) at a price of $8.50 per share which represents a 96% premium over last Thursday's close. Before the opening on Friday, the merger was announced, which resulted in a day's gain of over 57% for AVCA but far short of the bid and ending the day at $6.82.

Trading volume on Friday was nearly ten-fold over normal trading. This showed considerable interest in this transaction, but considering that the closing price represents another 25% premium to the offer, the markets are tentatively considering this proposal. Either the arbitragers are seeing considerable significant levels of collapse of negotiations or the market has not fully reacted to the 4th proposal by Covington since February 27, 2012.

The RSY Portfolio loves value stocks and while we evaluate stocks mostly on how the markets views values, this correlates with the value that other businesses place on these valuable companies. If this merger goes through, this will be the second position that RSY went long and was bought out, with the first being Lubrizol (LZ). Since AVCA does not have options available, and the next ex-dividend date is June 27 for just 5.5 cents, then this offer looks like a time to reduce our exposure or unload our position. RSY recommends to put in two bids with half the position in each bid (200 from the original 400 recommended). The first being a limit order of 200 shares at an asking price of $7.49 (GTC), and the second being a limit order of 200 shares at an asking price of $7.99 (GTC). If the offer holds for the next few days, the limit price of $7.49 should be easily met as the high on Friday was $7.54, and the limit price of $7.99 would still represent a little over 5% premium to the offer for others that wish to take the risks.

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