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Global Ship Lease, Inc. Message Board

  • sfi_watcher sfi_watcher Aug 15, 2011 12:10 PM Flag

    CRU/CPLP merger arb

    Full disclosure upfront, I haven't put a lot of money into this idea (yet)...

    CRU to be acquired by CPLP sometime around end-Sept, at an exchange rate of 1.56 CPLP units for 1 CRU share.

    CPLP current price: $6.80
    Implied CRU valuation: 10.61
    CRU current price: $6.70
    Arbitrage return: 58% in 1.5 months
    Annualized: 467%

    So with the CRU share price basically un-tethered from CPLP, the market is clearly betting that the merger will fall apart. The concern on the msg boards seems to be that CPLP may have to cut their dividend since CRU isn't generating the same level of cash as CPLP, which will scuttle the deal for CPLP holders.

    But, why should it? There's still a ton of benefit to CPLP from the deal. It's accretive to CPLP: at today's share prices, they're buying CRU at a Price/Book around 0.4, with CPLP units that are priced at a P/B around 1. The deal also delevers CPLP's balance sheet since CRU has a low debt/equity ratio. Also, CRU may not be generating the same level of cash as CPLP, but it is still DCF positive, and CPLP has already indicated they plan on moving CRU's boats from spot charter to "period" (time) charter which should improve revenues.

    Management also is still behind this deal, having committed all the shares they control to vote for it. Plus just this morning they reprinted an article from some analyst praising the deal and asserting CPLP can maintain their divy post-merger.

    So this is not a no-brainer, but it seems like the odds of this merger happening are much better than the market is attributing to it thru the respective share prices. Thoughts?

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