Saturday, June 15, 2024


Dhaka Tribune

STM Group (LON: STM) - still a 25% arbitrage to the takeover price

Sadly, this is time arbitrage at STM, so it carries risk rather than being a lockin

Update : 11 Jul 2023, 04:19 PM

STM Group (LON: STM) shares are up 100% this morning. STM shares have jumped because there's a takeover in the air. If we assume that there really will be that takeover then there's an about 25% arbitrage to be had from the current share price. But that assumption that there will be, well, it might not be something to assume with a 100% certainty. That's why this should really be classed as a speculation, not an arbitrage.

The announcement from STM: “The Boards of STM Group Plc (AIM: STM), the cross border financial services provider, and PSF Capital GP II Limited as general partner of PSF Capital Reserve LP ("Pension SuperFund Capital") announce that they have reached agreement in principle on the key terms of a possible cash offer for the entire issued and to be issued share capital of the Company ("Possible Offer") at a price of 70 pence per share. The Board of STM Group has confirmed to Pension SuperFund Capital that, should a firm offer be made on the financial terms of the Possible Offer, it would be minded to recommend it unanimously to STM Group's shareholders.”

STM Group share price from London Stock Exchange

Note that we're still at the stage of the girl twirling her hair - if you were to invite me up for a coffee then I would say yes but only if you were to invite me.

It's that which still produces the risk here. As we can see from the share price chart there's a 25% gap between the current price of 55 pence or so for STM Group and the 70 pence potential offer. Perhaps a bit less than that once we take the bid/offer spread into account. So, we've a clear 25% profit then? 

Well, no, because we've not certainty about the offer actually happening. We do need to consider why the information is released today. Is it because an offer is clearly about to happen and news has leaked? Therefore the market must be informed? Or is there a certain amount of trying to stampede the offer into happening? After all, it is normal enough that discussions happen over terms and details and then, at that last moment, someone suggests that instead of 70 why not at 60? Releasing this information to the market does prevent that sort of thing from happening. If this information release is about bouncing the bid into existence then, well, such bouncing doesn't always exist.

Therefore there is a risk in buying STM and just waiting for the bid. Whether to take that risk is up to the individual trader - we just point out that it's there.

To continue the analogy to the coming up for coffee - we're not at the stage of unwrapping the condom yet but definitely wanting to make sure one or more is available. And as we all know there is always still a risk of non-consummation at that point. 

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