Blockbuster (BBI / BBI.B): Relative Value Arbitrage Opportunity
U P D A T E
Since September 23 the “A” Share / “B” Share spread has fallen from $0.89 to $0.75. The arbitrage return is technically infinity.
T H E S I S
3:03 AM Cogitator: also blockbuster is attractive
Client-9: who’s buying and how is it being financed?
3:05 AM Cogitator: nobody
it’s just share class arbitrage
buy the b shares and short the a shares
3:09 AM Client-9: my computer is being slow right now… what’s the spread
Cogitator: 60%
3:11 AM Client-9: wow. what’s the difference between the two securities?
3:12 AM Cogitator: b shares have two votes; a shares only have one
Client-9: how are the company’s financials?
3:13 AM Cogitator: it’s blockbuster…
pretty crappy
but if you buy the b and short the a, you will make money
3:14 AM most brokers don’t let people short sell bbi
which explains the large spread
3:15 AM Client-9: how do they historically trade?
3:16 AM Cogitator: http://finance.yahoo.com/echarts?s=BBI#chart2:symbol=bbi;range=3m;compare=bbi-b;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Might want to tag this under ‘carl icahn’ as he controls the company.
Thanks. I forgot about that.
Cogitator, what do you think of Warren Buffet’s investment in Goldman Sachs today? Certainly he must see some valuation in it.
The arrangement is very satisfactory for Berkshire but not as much for Goldman Sachs common shareholders. First, the preferred shares are callable at a 10% premium to par; second, the dividend rate is 10%; and third, the warrants may ultimately be worth several billion dollars (if they are exercised, outstanding shares will increase by one-fifth). GS could have gotten more attractive nominal terms elsewhere. However, the past year has shown that balance sheet strength is highly dependent upon the confidence of customers. I believe that news of Buffett’s involvement will prevent what happened at Bear Stearns and Lehman Brothers–a sudden withdrawal of accounts and a subsequent loss of earning power. Just as most of the fear regarding broker dealers is irrational, so too is the reassurance brought about by Buffett’s support–this seems to be another example of market reflexivity.
I have no opinion on the common shares other than that a precipitous fall is almost impossible.
The A/B spread is a measure of liquidity premium. The less financing around the greater the premium. Be warned, be careful.
Could you explain how the A/B spread manifests a shortage of financing?
The historically high spread may have resulted from the exit of relative value arbitrageurs. (Donald MacKenzie writes about this in An Engine, Not a Camera.) Of course the anonymous nature of the stock market makes it difficult to be certain.
The borrow on the A shares is about 13%. Last year it was somewhere around 5% if not zero. One possible explanation is that the demise of many financial institutions combined with widespread counterparty mistrust has led to a severe shortage of stock willing to be lent out. This is most noticeable in small cap stocks since small changes in supply can have dramatic effects.
Your theory is plausible. I suppose only the brokers and their hedge fund clients know for sure.