In short: A new merger-arb long bought after the spread re-opened. "We added RSVR after a PE offer at 10.50 a share after the shares weakened below $9 a share… this stock was trading over 11 because of this offer… people thought there was going to be a topping bid above 10.50. The shares then fell all the way to nine. We bought them in the low nines, and we think that this 10.50 share at minimum should go through." The bidders: "the 10.50 cash bid from a majority insider, Wesbild / Richmond Hill, and competing interest from an activist fund that also wants to buy called Irenic Capital" (the deck: Irenic in the $10-11 range) — "Wesbild controls about 44% of the equity and Irenic owns 9.2%. So combined, these guys own 53%," with "no financing condition." The business underneath: "624 million market cap, a billion enterprise value, 450 million of debt, but 70 million of EBITDA… 40 million of free cash flow after paying interest, which is about an 8% free cash flow yield… growing between 10 and 18% a year," a music publisher at a 65% gross margin whose catalogs earn "inflation-hedge recurring revenue… low correlation to broader economic cycles." The bracket: "before the company received these bids, the unaffected price was around 7.50… worst-case scenario, I think it trades down below eight. Best-case scenario, it trades above 10.50 because there's a bidding war… we do think there's a high probability that this bid will go through." Asked when it closes: "there is no close date because it's not clear which bidder is going to win yet."
Reservoir Media owns music catalogues — the rights to songs and recordings — and earns royalties whenever they are streamed, broadcast or licensed. That kind of income is steady, grows with inflation, and has little to do with the economy, which is why investors who want predictable cash flow like buying it.
Earlier this year its largest shareholder, which already owns about 44%, offered $10.50 a share in cash to buy the rest. A second investor, the activist fund Irenic Capital with 9.2%, has also shown interest in buying. The shares rose above $11 on hopes of a bidding war, then drifted all the way down to about $9 as nothing happened. Singh bought in the low $9s.
The arithmetic is the attraction. If the $10.50 deal goes through, he makes roughly 15%. If a bidding war breaks out, more. If both bidders walk away, he estimates the shares fall to somewhere under $8 — the pre-bid price was about $7.50, but the business has grown since. The company earns about $70 million a year before interest and tax, produces $40 million of free cash (about an 8% yield on its market value), and the bids come without financing conditions. The one open question is timing: there is no closing date yet, because nobody knows which buyer will win.
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