Redbox Entertainment Inc. (Nasdaq: RDBX) stock is soaring. It looks like a takeover bid is driving the 300%-plus rally over the last month.
Redbox operates self-service kiosks that rent new-release DVDs and Blue Ray discs. These large red machines are often by the door at your local Walmart or Walgreens. Redbox also has a streaming service and produces some of its own content.
Redbox went public through a special purpose acquisition company (SPAC) at $10 per share in October. RDBX reached almost $19 per share before falling below $6.
Here’s where the story gets interesting…
Chicken Soup and Redbox: A Strange Deal
While trading at $5.60, Chicken Soup for the Soul Entertainment Inc. (Nasdaq: CSSE) offered to buy RDBX for $0.69 a share. The company accepted the offer despite a lack of a cash.
The deal translates to 0.087 Chicken Soup shares per Redbox share.
It seems strange to accept a buyout at an 88% discount to the stock price. But the companies noted Chicken Soup would provide assets to help Redbox shore up its balance sheet.
Reading between the lines, Redbox was likely heading for trouble, and the deal provided a lifeline.
Traders, for some reason, think that RDBX is worth more than what Chicken Soup is paying — about 18 times more!
You can see the disconnect in the chart below. The red line is the value that Chicken Soup is paying for the company. The red arrow marks when the deal was announced.
RDBX Value vs. Chicken Soup Payment Value
Meme traders are the apparent cause of the difference between the two values. Analysts blame traders who believe a short squeeze will drive RDBX higher.
Individuals who hope to repeat last year’s GameStop story are piling into the shares.
It’s possible large hedge funds didn’t learn from GameStop, but it’s doubtful. Wall Street firms learn fast when money is at risk.
What’s Next for RDBX
Expect the deal to close before the end of the year. Large shareholders of both companies have agreed to it. There are no regulatory issues so far. And there shouldn’t be financing issues.
Bottom line: The deal will close at the agreed-upon price. That means RDBX will fall to under $1. Funds shorting shares understand the risks and no doubt have the capital to profit from the trade.
If put premiums drop, this will be a great trade.
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Michael Carr is the editor of True Options Masters, One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.