LEAF shareholders are being short changed on ACB share swap.It is interesting to discover how the stated implied premium of 34% that ACB would pay LEAF has faired since the acquisition announcement May 14th along with the history of price action between the two.
ACB LEAF Act Ratio DealRatio ImpRatio
20 day VWA price as of 5/11/2018 $8.19 $21.98 2.686 3.575 0.331
20 day VWA price as of 7.25/2018 $8.38 $27.70 3.305 3.575 0.082
Actual Price as of May 11 2018 $8.07 $24.90 3.086 3.575 0.159
Actual Price as of July 25 2018 $6.99 $24.63 3.524 3.575 0.015
As expected, arbitragers have closed the implied premium gap to zero (or close to it as we are mid day July 25th). The interesting thing to note is that LEAF price is being driven by ACB price, which is currently trading at around $7.00. From a statistical point of view, ACB has traded at this price less than only 1% of the time since the deal was announced on May 14th. Given that the percent change in the 20 day volume weighted moving average prices between the deal date and today have increased (ACB +2.3% and LEAF +26.0%) ACB will complete the deal for LEAF shares at the most favorable price to ACB shareholders and at the worst price for LEAF shareholders.
For LEAF shareholders to achieve parity with the 20 day VWA price, ACB shares would need to appreciate by 12.5%.after conversion.