How to get free shares when converting

At the time of the release of significant news about issuers, market participants focus all their attention on them, so price fluctuations can occur, often irrational and quite strong. They are the source of profit for speculators. Long-term investors are not inclined to react to corporate news immediately after its publication. Nevertheless, with a competent approach and prompt response to events, even long-term investors can receive bonuses in the form of cash or even “free” shares.

Consider how you can effectively use market volatility when important corporate events occur.

Initial data

Vasily is a long-term investor who buys shares with his own funds, does not use margin lending in his strategy and does not open short positions. Vasily is also a supporter of a wide diversification of assets in the portfolio. By the summer of 2022, among other things, 1,650,000 shares of FGC UES (FEES) and 120,000 preferred shares of Rosseti (RSTIP) were purchased from him .

When Rosseti and FGC announced their reorganization, market prices were well below Vasily’s average purchase prices. As a result, both FSK and Rosseti had losses. Therefore, there was no question of taking advantage of the ransom and exiting their positions with a profit. However, Vasily is a long-term investor, current paper losses do not bother him, and he is not going to leave the capital of FGC. The investor began to watch stock prices and look for profitable opportunities.

Stock Conversion and Possible Investor Behavior Strategies

In mid-July, when FGC and Rosseti announced their merger, FGC shares were trading at 0.0886 rubles, and preferred shares of Rosseti at 1.247 rubles. At the same time, the companies set the following buyout prices from dissenting shareholders: FEES – 0.0904 rubles, RSTIP – 1.273 rubles. Officially, the RSTIP to FEES conversion ratios were not announced, but Vasily suggested that for one preferred share of Rosseti, 1.273 / 0.0904 = 14.081858 shares of FGC UES could be obtained.

If the conversion rate differs significantly from the calculated one, then there will be an opportunity for arbitrage. By buying or selling certain shares as a result of the conversion, it will be possible to receive a package, the value of which will exceed the value of the original block of shares.

When buyout prices are announced, the market price rushes towards them. After all, if the market price is below the buyout price, then a market participant can simply buy a share on the market and present it for buyout.

If the market price is higher than the buyback price, then the buyer has no reason to buy a share in the market – sellers have to reduce the price until a buyer is found. It is logical that the buyer will appear at a level approximately coinciding with the buyout price.

Such a strategy may be suitable for the shares of Rosseti, since two scenarios are possible here. Either the buyer who bought the shares at a higher price than the buyback price will buy FGC UES shares for a smaller amount, or simply receive less money as a result of the buyout.

In the case of FGC shares, the logic with a market price higher than the buyback amount is not obvious – there are no objective reasons why the market price should fall. FSK will continue to work, the share may grow in price, and even buying more than the buyback price, the buyer will be in the black.

If there is interest in owning FSK shares, then it makes sense to try to get additional shares when the opportunity presents itself. If FGC shares are trading above the buyback price, and Rosseti shares are trading below, then you can sell the available FSK shares, buy Rosseti shares and wait for the conversion. As a result, the investor will have more shares of FGC than it was originally.

Vasily receives “free” shares of FGC UES

First of all, Vasily calculated how many shares he would have in total as a result of the reorganization of FSK if he did not take any action. Based on self-calculated coefficients, it turned out that after the conversion he would have 1,650,000 + 120,000 * 14.081858 = 3,339,823 FGC shares.

Immediately after the announcement of the reorganization, the shares of FGC and Rosseti were traded on the exchange about 1% below the buyback prices. There was nothing attractive in this situation, so Vasily just watched the price movements.

On July 25, FGC shares traded at 0.0954 rubles. (approximately 5.5% higher than the buyback price), and Rosseti – 1.229 rubles each. (approximately 2.2% below the buyout price). The difference with the buyout prices was already significant, so Vasily sold all the shares of FGC, and bought more shares of Rosseti with the proceeds. He managed to buy 128,000 papers, and now their total amount was 248,000 pieces. As a result of the conversion, Vasily expected to receive 248,000 * 14.081858 = 3,492,301 shares, that is, the investor would get 152,478 shares “for free”. Pretty good result to stop at.

However, on August 3, FGC and Rosseti announced conversion ratios, and the shares of companies (we are talking about preferred shares of Rosseti, ordinary shares collapsed by 20% that day) soared in price. By the close of August 3, FGC UES added 5.56% in value, and Rosseti – 6.12%, compared with the close of the previous day. Assuming that Rosseti was unlikely to be more expensive, on August 3, Vasily sold all of his 248,000 shares at a price of 1.306 rubles. a piece. He could immediately buy FGC UES at current prices (more than 9.5 kopecks per share). Even with such a deal, Vasily would have received another 10-20 thousand “free” shares of FGC, but he decided to wait in the hope that the price of FGC UES shares in the coming days would drop to about the buyback price, and possibly even more as a result of some panic sale.

On August 9, Vasily placed a limit order for the purchase of FGC UES shares at a price of 9 kopecks. per share for the entire amount received from the sale of Rosseti securities. This money was enough for 3,590,000 shares. The result exceeded all expectations. Compared to the original position, Vasily received 250,177 “free” shares. Due to market volatility, the initial number of shares increased by about 7.5%.

How can an investor capitalize on market volatility?

Of course, a certain amount of luck in such transactions was present. Big fluctuations in prices might not be. In this case, Vasily would have to be content with only those shares that he received as a result of the conversion.

However, this example shows how a long-term investor, having timely oriented himself in the situation, can turn market inefficiencies (in this case, the difference between buyout prices and market prices) in his favor.

Not an investment recommendation.

 

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