Position disclosure: I own 1,060 shares of Matterport. Just wanted to share my thoughts—not financial advice.
TLDR: I expect a 17% return by the end of the year with low risk (as I believe the deal is likely to close), but deep exposure (if the deal fails, I could lose at least 50% of my investment).
CoStar, known for its real estate analytics and five major acquisitions since 2019, announced it’s buying Matterport for $5.50 per share. The offer includes a mix of 50% cash and 50% stock. The stock portion is subject to a 10% “symmetrical collar” mechanism, I will get into that later.
The announcement made the stock price go ballistic back in April and fueled a 80% rally. Unfortunately I didn’t have insider information, BUT considering that Matterport stock price is actually around $4.50 there is a substantial profit to get right ?
I will get into why I believe the deal will close, how does the symmetrical collar mechanism can impact profitability of that arbitrage trade and why I believe the stock is currently trading at $4.50.
First : High Closing Likelihood
On the bright side :
- CoStar has $5 billion in cash, easily covering the $1.6 billion deal without needing to borrow.
- Shareholder approval will take place today. Management, holding 15% of the shares, has already voted for the deal. Other shareholders should agree since the stock was trading much lower before the announcement (a premium of over 200%).
- Regulatory approval should be a formality since CoStar is acquiring Matterport for its tech (3D cameras and AI tools), not to eliminate competition.
- If the deal falls through, CoStar has to pay an $85 million termination fee.
Few things to keep in mind tho :
- The FTC requested additional information in early July. According to management, they are working on that and are not expecting consequent delay, the deal still on track for end of 2024. My understanding is that the deal could take place early 2025, so I would not take an option with a short maturity if I wanted to use an option strategy
- In 2021, CoStar's attempt to acquire RentPath was blocked due to antitrust concerns. I just wanted to mention that to be transparent. CoStar would have owned 70% of the market with the acquisition of RentPath according to FTC. In this case don’t see antitrust issues
Second: Symmetrical Collar Mechanism
According to CoStar's press release, the transaction is subject to a 10% symmetrical collar based on a CoStar Group share price of $86.02 as the midpoint. What does this mean?
It means that Matterport shareholders would receive the same amount of CoStar shares if CoStar's share price falls between $77.42 and $94.62. This collar represents a 10% gain or loss on the stock portion. However, keep in mind that the stock portion only constitutes 50% of the deal. This means you could receive either a 5% discount or a 5% premium on the offered price of $5.50, with a minimum price of $5.22 and a maximum price of $5.77.
Currently, with CoStar's share price at $78.84, which is slightly above the lower limit, the effective price per Matterport share would be adjusted accordingly. If you were to sell Matterport shares immediately after the offer, you would receive a price of $5.27 per share, representing a 17% return.
Third : OK but why is Matterport stock trading at 4.50 ?
One things is sure, it is that there is a lot to lose if the deal does not close.
You have been warned! Before the announcement of the acquisition, the stock was trading below $2.00 on a downward trend. So you can lose more than 50% if the closing fails. Relatively, there is not so much to win if the deal closes.
I believe the price is currently discounted to take into account risk of a 50% downfall. However, I have seen the price rising those past days, so the market might think the deal is likely to close too.
I am writing this before the market opens, but keep in mind that the stock price could continue to rise throughout the day, particularly as Matterport's shareholder approval meeting is scheduled. The results of this meeting will be announced around 1 pm ET and will influence the stock's performance.
Thanks for reading this to the end! First post here so let me know your thoughts on this.
