Does Rent-A-Center Hold A Merger Arbitrage Opportunity?

Rent-A-Center Inc RCII agreed to sell itself to Vintage Capital Management at $15 per share, which has some investors questioning why the stock is trading at an approximate 70-cent discount to the purchase price. Loop Capital Markets took a dive into the stock's potential merger arbitrage opportunity.

The Analyst

Loop Capital Markets' Anthony Chukumba maintained a Hold rating on Rent-A-Center's stock with an unchanged $15 price target.

The Thesis

Immediately following Rent-A-Center's initial acquisition announcement in June, the stock was trading within 1 percent of the $15 per share offer, Chukumba said in a Tuesday note. (See his track record here.) 

At that time, the narrow spread suggested investors were confident in the deal closing despite a lack of financing contingency from Vintage Capital, the analyst said. Yet the spread between Rent-A-Center's price and the takeout offer has notably expanded over the past few weeks after the Federal Trade Commission sent a second information request, he said. 

The FTC's second request for information shouldn't come as a surprise, as Vintage Capital already owns a competing rent-to-own business, Buddy's Home Furnishing, Chukumba said. Most rent-to-own customers fall within lower income brackets and/or poor credit scores, while the industry as a whole has a poor historical consumer protection track record, he said. 

Vintage Capital "has a lot of incentive" to complete the acquisition of Rent-A-Center, a retailer whose turnaround strategy is progressing at a better-than-expected rate, in the analyst's view. Vintage Capital will likely be "highly amenable" to any potential FTC requests or remedies, including significant store divestitures, Chukumba said. 

Under a scenario where the transaction is not completed, the downside to Rent-A-Center's stock is relatively limited, and after an initial investor shock, shares should trade around the $13 to $14 level, according to Loop Capital Markets. 

Price Action

Rent-A-Center shares were trading nearly flat at $14.29 at the time of publication Tuesday.

Related Links:

Why Stifel Says Rent-a-Center May Go For $10.50 Per Share In A Sale

Rent-A-Center Receives A Bid From A Familiar Source

Photo by Jeff Bedford/Wikimedia.