MOBI - Sky-Mobi limited

[writser]

Here's another small Chinese reverse merger that nobody will be interested in. Sky-mobi is a mobile game publisher, funded by Sequioa Capital. It went public in 2007. This is a small company and performance has been lackluster. However, they are still moderately profitable and the balance sheet is solid with ~$102m book value, ~$52m cash and ~23m term deposits as per the latest annual report. Market value of the company is ~$60m.

 

The founder and CEO, Michael Song, owns approximately 31.8% of the stock together with his wife. He is trying to take the company private with a group of investors. In their most recent proxy they set the date for the shareholder vote at 16 november 2016. Currently shares are trading at $2.07. The offer is for $2.15 ($2.20 minus a $.05 ADS fee). Why do I think this is a decent deal?

 

- The rollover group has a majority stake (50.2%) so I'm pretty sure the vote will pass.

- Given the small size of the deal I don't expect any regulatory problems

- Given the balance sheet of the company I think the buyers have no problem _at all_ trying to raise $30m to buy out minority holders. It is a relatively small amount anyway.

- Termination fee is $2m which is significant given that they only need to cough up $30m for the deal. The buyers have a decent incentive to get the deal done.

- These guys are moving extremely fast. The proposal was first discussed in May, presented in June and now the vote is in November. Most of these deals take way longer. I think they are opportunistically taking advantage of the low share price this year and want to close the deal asap (another way to say this would be: they are ripping off shareholders).

 

And finally the most important argument: if you can buy today at $2.07 and the deal closes around year-end your IRR is approximately 20%. Why this opportunity exists? I think this company is too small / illiquid for most professional investors, mom-and-pop investors are allergic for Chinese stocks and investors underappreciate the IRR of a short-term deal with a small spread. Of course I wouldn't recommend going all-in on this name but I think it is a decent idea for a diversified portfolio.

 

[Foreign Tuffett]

In support your contention that this thing will surely pass at the shareholder meeting:

 

"Given the Buyer Group's ownership as described above and assuming it complies with its voting undertakings under the Support Agreement, based on the number of Shares expected to be issued and outstanding on October 24, 2016, the record date for voting Shares at the extraordinary general meeting (the "Share Record Date"), an amount of Shares representing approximately 16.5% of the voting power of the entire issued and outstanding Shares as of the Share Record Date owned by shareholders other than members of the Buyer Group must be voted in favor of the special resolutions to be proposed at the extraordinary general meeting for them to be approved, assuming all shareholders of the Company will be present and voting in person or by proxy at the extraordinary general meeting."

 

So they only need about 1/3 of the 50% of shares to vote for the transaction. Seems like a very low hurdle.

[writser]

MOBI has been creeping up 3% the past month and is now trading at $2.13, equalling a <1% spread. IRR is not great anymore but since transaction costs are quite high I'll probably hold until completion.

[Foreign Tuffett]

MOBI has been creeping up 3% the past month and is now trading at $2.13, equalling a <1% spread. IRR is not great anymore but since transaction costs are quite high I'll probably hold until completion.

 

I sold out, taking a small gain. Thank you for the idea.

[writser]

Deal closed: link. Quiet and boring, 4% in a month. Just the way I like them.

[philippoc93]

Good job writser. Pity I missed this one.

 

Phil

[gfp]

Thanks for sharing this one.  It was very low risk

[hillfronter83]

Thanks for sharing this one.  It was very low risk

 

If you like MOBI, you might like EFUT too.