A Curious Wrinkle in Prospect Capital Corporation's Latest Buyout

Nicholas Financial (NASDAQ: NICK  ) shareholders may be getting a pretty good deal after all. The automotive finance company agreed to be acquired in December by Prospect Capital (NASDAQ: PSEC  ) , a business development company.

The deal is a stock-for-stock transaction in which Nicholas Financial shareholders will receive $16 in Prospect Capital stock for every share of Nicholas Financial they currently own. But there's a kicker: The number of shares Prospect Capital will dole out is based on its own volume-weighted average price during the 20 days prior to closing. The deal was supposed to close before June 12, 2014, which now appears impossible.

But, if it were to close quickly, Nicholas Financial shareholders would stand to get a much better deal than they otherwise expected. When the deal was announced, Prospect Capital shares traded for nearly 10% more than they trade for today. The discount during the last 20 trading days has been even greater.

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Why it matters
Nicholas Financial shareholders are, essentially, getting more for the same company. Prospect is, in a sense, paying a much higher price to acquire Nicholas Financial. It also creates a pretty interesting merger arbitrage situation in which you can buy Nicholas Financial today for less than $16 per share, and end up with $16 per share in Prospect Capital stock should the transaction go through.

Do note, though, that the $16 in Prospect Capital stock would be based on the 20 previous trading days -- days during which Prospect Capital may have traded for much lower than its market value at the time of closing. That means more stock than what $16 will buy on the open market. 

There are risks, of course. The deal might not go through. Prospect Capital's share price may surge on very high volume in the next few days, eliminating some of the arbitrage opportunity. Or it may take several months for the deal to close, which would result in lost dividends.

But for market followers, this is an interesting wrinkle that forms when all-stock deals meet market volatility.

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  • Report this Comment On June 12, 2014, at 2:52 PM, postnasaldrip wrote:

    UPDATE: The deal DID NOT go through. NICK announced this afternoon the board had decided to terminate the deal. Bad for them, good for PSEC.

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9/1/2015 3:59 PM
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Prospect Capital C… CAPS Rating: ****