What: Shares of Apollo Residential Mortgage, (NYSE:AMTG) are surging by nearly 27% as of 12:40 p.m. EST Friday after the company announced its attention to sell itself to Apollo Commercial Real Estate Finance (NYSE:ARI).
So what: Under terms of the deal, Apollo Residential Mortgage shareholders will receive 0.417 shares of ARI and $7.53 in cash for every share they own of AMTG. The deal valued the company at about $14.59 per share, based on Thursday's closing price of Apollo Commercial Real Estate Finance prior to the announcement.
This deal could get messy. First and foremost, a price of $14.59 per Apollo Residential Mortgage share values the company at a discount to its book value of $16.40 per share as of Dec. 31. One could argue that the mortgage REIT is better off winding down in hopes of achieving a valuation of book value vs. selling out at a discount to book.
In addition, the companies are both managed by subsidiaries of Apollo Global Management (NYSE:APO). As one further roadblock, Apollo Residential Mortgage last traded at a premium to the merger offer as recently as July 2015. Many of its investors will likely have to realize a loss if this deal goes through.
Now what: It's interesting that the companies have moved in very different directions after the announcement. Apollo Commercial Real Estate Finance's (the acquirer) shares are down about 6% as of 12:40 p.m. EST Friday as opposed to a 27% increase in Apollo Residential Mortgage's share price at the same time.
Apollo Residential Mortgage shares are pricing in some risk that the acquirer's stock loses value or that the deal doesn't go through, as shares currently trade at a discount of 8% from the merger offer, based on current market prices.