Every now and then you encounter a situation in the (micro-cap) stock market that makes you wonder: am I wrong or is the market wrong?
Canada-listed The Intertain Group (TSE:ITX) is an indirect subsidiary of UK-listed Gamesys (LSE:GYS). Gamesys was formerly known as JPJ Group and still trades under its old ticker (LSE:JPJ) with some brokers.
In August of 2019 Intertain’s shareholders approved an early redemption of Intertain shares, in which Intertain shares will be exchanged into Gamesys shares on a 1:1 basis. The exchange will also include a cash amount to shareholders to satisfy the payment of any UK stamp taxes which are due as a result of the share exchange.
Important to note: While non-US holders will receive actual shares in this exchange, US holders will receive a cash equivalent. As a result of the (compulsory) redemption, Intertain’s listing in Canada will cease to exist.
Fast forward to 2020: Intertain has confirmed this week the actual redemption will take place on the 13th of January, which is next Monday.
In an efficient market, one would expect the share prices of The Intertain Group and Gamesys to align, especially as Gamesys shares have a stable, cheap borrow for shorting (and therefore the option to hedge this trade), but this hasn’t happened. Intertain shares have consistently been trading at a 4-8% discount.
Could it be tax implications that create this spread? I’ve reached out to Gamesys Investor Relations. As the redemption will be undertaken by Intertain CallCo, instead of Intertain itself, it’s my understanding the redemption should not be deemed a dividend but should be liable for capital gains and losses. As I’m not a Canadian investor, these do not apply to me.
Intertain shares are not very liquid, and it’s clear its market cap is way too small to attract major arb players, but it still trades often enough to make this trade practically feasible for small investors. So, where are they?
Intertain still has three days of trading before redemption will take place. Market liquidity is low, but a decent size limit buy order does get lifted by the occasional seller if the trading history of the last couple of days is anything to go by. Currency risk can be hedged by selling British Pounds against Canadian Dollars for an equivalent amount (although I usually don’t bother in stable currency pairs). I’ve included a chart that shows the current spread based on 30-minute delayed prices: I’ll keep it online until Intertain stops trading.[Update 14th of January: Intertain has been delisted. Chart has been removed.]
I’ve seen similar spreads before in cross-currency arbs. Even in these last weeks Canadian Avesoro Resources (formerly TSE:ASO) consistently traded at a discount to an already unconditional go-private offer made in GBP. That offer has now successfully closed.
For me the biggest risk in a special situation like this is that I’m missing part of the picture (which does occasionally happen): does this spread exist for a reason, and am I just not smart enough to see it? Will my broker slap me with some ridiculous fee somewhere along this process? Or is my reading of the tax situation completely wrong?
Other risks include the redemption might take a long time to complete. But then again, Gamesys borrow is cheap, so I don’t care too much.
I’ll soon find out who was wrong here.