Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the 3rd Circuit. @matt_levine Redbox?!?
We talked last month about Redbox Entertainment Inc., a company that (1) went public in October 2021 by merging with a special purpose acquisition company at $10 per share, (2) traded as high as $17.93, (3) then traded down to $5.60, (4) then agreed to be acquired by Chicken Soup for the Soul Entertainment Inc. for about $0.69 per share in stock, an 88% discount to its trading price, and (5) then traded down to $2.58 per share. That was weird! Two weird things were:
> Why would the company agree to sell for $0.69 per share when it was trading at $5.60? (“We were bringing assets that were helpful in terms of the debt, cleaning up of the capital structure, access to new cash,” Chicken Soup’s chief executive officer sort of explained .)
Why would people buy stock for $2.58 when it is going to be merged out of existence at $0.69?
You might have told a story like “the deal won’t close and the stock will shoot up as people realize the great value of an independent Redbox,” but there is no evidence for that; in fact Redbox’s controlling shareholders had approved the deal so the odds of it falling apart are low.
Or you might have told a story like “the stock will trade down to $0.69 as people realize what is happening,” but that story would have been wrong. Redbox has rallied . It closed at $9.47 yesterday, and was up again this morning; at noon today it was trading at about $12.89 on heavy volume, tons of social-media enthusiasm and absolutely no news. Meanwhile Chicken Soup’s stock hasn’t done much; it closed yesterday at $7.31, making the merger consideration — 0.087 Chicken Soup shares per Redbox share — worth about $0.64 per Redbox share. You can buy a Redbox share for $12.89 today, and when the merger closes you’ll get 0.087 Chicken Soup shares. Or you can buy a whole Chicken Soup share today for $7.31, and when the merger closes you’ll still have a whole Chicken Soup share. One Chicken Soup share, which you can buy for $7.31, is worth about 11 times as much as 0.087 Chicken Soup shares, which you can buy for $12.89. Why?
I dunno. But there are two lessons here. One is that the essential function of a meme stock is to be a Schelling point : A meme stock is a stock that you want to buy because other people want to buy it. How a stock becomes a meme stock is, to me, a mysterious process, but there is no obvious reason that “people think it has a lot of fundamental value” would be a particularly important part of the process. (Really, “a stock that you buy because other people want to buy it because it has good long-term cash flows” is the opposite of a meme stock; that’s just a regular stock.) You want your meme stocks to be fun ; you want the story to be vivid; you want the online discussions where you egg each other on to buy the stock to have a sense of drama and comedy. At Quartz last month, Scott Nover wrote an article titled “ Redbox is the dumbest meme stock yet ”: On Reddit, there’s been chatter about a short squeeze, but only about 29% of Redbox’s public float has been sold short, according to data published by FactSet. Short squeezes work when so much of a company’s stock is shorted that when buyers drive it up, shorts have to re-enter the market by buying new shares to cover their own loss, sending the stock even higher. (By contrast, 140% of GameStop’s float was shorted when retail traders took it to the moon in January 2021.)
When the sale to Chicken Soup for the Soul closes in the next few months, Redbox stockholders will be paid out at $.49 a share. “I don’t see any scenario where an investor could make money, aside from the greater fool theory,” one financial analyst told Yahoo Finance.
In other words, retailers might be pumping the stock and hoping to get out before the dumping starts. This trading activity appears to have nothing to do with movies, streaming, […]
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