Eurocastle Investment: A Quick 2% Arbitrage Opportunity

Eurocastle Investment (AEB: ECT) is a closed-end investment company, listed on Euronext Amsterdam. The company announced some time ago it will no longer seek material new investments, and will focus on distributing cash to shareholders when available.

After Eurocastle recently sold a large part of its portfolio for cash, it announced a tender offer in which it will distribute cash, but also its 19% stake in Milan-listed doValue (BVME: DOB), a specialist in managing non-performing loans.   After the tender offer is completed, there won’t be much left of Eurocastle: it will be reduced to holding predominantly investments in Italian real estate funds, which likely won’t be liquidated until the end of 2023. 

The offer
Eurocastle is offering to buy back up to 94.91% of its own shares, in exchange for a cash component, and a doValue-share component. The exact ratio is dependent on the amount of shares tendered. Shareholders owning 76% of Eurocastle have already said they will tender in this offer.

  • If none of the other outside shareholders will tender, Eurocastle shareholders will receive 1.92 euro in cash and ~ 0.5441 shares of doValue
  • If all of the other shareholders will tender, shareholders will be slightly prorated and receive 3.16 euro in cash, and ~0.4353 shares of doValue

It seems likely the end result will turn up somewhere in the middle of this range, with no or virtually no proration.

The tender offer will close on the 17th of December, unless extended. DoValue shares will be delivered from the 20th of December onwards.

DoValue shares are easy to short, with a negligible 0.6% annual borrow rate. Both Eurocastle and doValue shares are quite illiquid, but tend to trade through the bid and ask multiple times a day if you’re patient.With Eurocastle stock closing at 7.62 euro today, and doValue at 10.66 euro, the value of the tender is somewhere between 7.72 euro and 7.80 euro per Eurocastle share, depending on the final distribution ratio. This is an arbitrage opportunity of between 1.3% and 2.4%. Intraday for the last couple of trading days, the spread has widened and contracted several times, but worked out to similar percentages on average, depending on execution. So if you time your offers, you might be able to generate a better return.

Taking into account commissions, borrow costs and (I believe) a 0.22% Italian Transaction Tax payable on being assigned the doValue shares, the real returns work out a little bit lower.  Doesn’t sound like much perhaps, but considering the small amount of risk and the very short holding period, it’s an annualized return I am quite comfortable with.

Update 18th of December:

Eurocastle announced today it has completed the tender offer. The exchange ratio is set at 0.4353 share of doValue and EUR 3.16 in cash, for every Eurocastle share tendered. Proration should be minimal at less than 1% of shares tendered.

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