Jaclyn Incorporated is a designer, distributor and manufacturer of women and children’s apparel and accessories. They have been in business for over 75 years, and last year had total revenues of $154.5 million. They are currently traded on the AMEX exchange and maintain a market cap of less than $25 million. However, the management of Jaclyn no longer sees a benefit to being publicly traded, and has reported to the American Stock Exchange that it no longer wishes to be listed. The Company intends to withdraw its shares of common stock from listing on the AMEX.
The reason for the delisting is that, since being listed on the AMEX in the 1990s, the value of its shares have not appreciated as planned. In 1995, 2005 and even at this present time, shares of JLN are trading around $8.60. The main benefit of being publicly traded is to use the equity market to finance future growth, but the company doesn’t take advantage of this money. For these reasons, the $500,000 average cost per year that it is estimated JLN pays to remain a fully filing public entity no longer outweighs the benefit.
This is where the arbitrage situation could come into play for risky investors. In order to be delisted, the company will need to have less than 300 stockholders, and in order to accomplish this, the board will have to approve a reverse/forward stock split of 1-for-250 shares. This means that any stockholder owning less than 250 shares will receive a cash payment of $10.21 per share, and those owning more than 250 share will retain their current number with no change. Assuming that an investor buys 249 shares at the current price, the cost would be $2,141.40, less any transaction costs. The company would than repurchase those shares for $10.21 per share, for total proceeds of $2,542.29, resulting in a profit of $400.89 to the buyer.
Arbitrage, by definition, requires no risk, and all rewards, so this case does not yet fit into this category. The entire scenario is still dependent upon shareholder approval at a May 7th meeting. If shareholders scrap the plan, then you will be a proud owner of 249 shares of JLN, which will remain traded on the AMEX exchange.
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