Risk Arbitrage: Restoration Hardware (RSTO)

Not too sure about this one but I'm wondering whether I should take a risk arbitrage position in Restoration Hardware (RSTO). A management-led private equity buyout is in the works for $6.70 (deal expected to close in March 2008). The company has said it will solicit other offers until December 13th. It looks like Sears Holdings (SHLD), led by value investor Eddie Lampert, is thinking of bidding for the company. Speculation is that RSTO will be a good strategic fit for SHLD so a higher bid may come.

The shares are currently trading around $7, which is about 5% more than the original offer by the private equity group. The problem for anyone taking a position now is that no new offer may come from SHLD. Sears has bought up almost 14% of RSTO's shares so even if they don't offer anything, they will profit from the original bid; whereas if you buy the stock now, you will end up with a 5% loss. The motives of Sears isn't clear. The strategic fit argument would have a lot more merit if (i) Eddie Lampert wasn't a value investor, and (ii) the original offer wasn't such a big premium (the offer was a 100%+ premium). Value investors will forgo opportunities than overpay so I don't know how much Lampert thinks RSTO is worth. For instance, he might have liked it when the stock price was in the $4 to $5 range but I'm not sure how much higher than $7 he will pay.

The one positive going for RSTO risk takers is that strategic buyers will pay more than what private equity can these days.

I'll think about this... most likely I think I'll pass on this...

Comments

  1. AnonymousFebruary 10, 2008 at 3:09 PM

    I stayed away from this one too! Good thinking! I go to www.madmergers.com for my merger data.

    ReplyDelete

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