Description

Summary

We are recommending selling calls on RDBX which is undergoing a takeunder at ~$0.63 per share while the current stock price is $3.73.  With the vast majority of shareholders in RDBX and CSSE (the acquiring company) having already approved the deal there is very low risk that the deal falls apart.  Though the borrow on the stock is tight, we believe selling calls are an good risk reward given the high probability that the takeunder will be completed.   

Overview

Redbox (RDBX) is undergoing a take-under with Chicken Soup for the Soul Entertainment (CSSE).  The terms of the acquisition are 0.087 CSSE shares for each RDBX share.  

Under the terms of the agreement, which has been approved by the Boards of Directors of both companies, Redbox stockholders will receive a fixed exchange ratio of 0.087 of a share of class A common stock of Chicken Soup for the Soul Entertainment per Redbox share. Following the close of the transaction, Chicken Soup for the Soul Entertainment stockholders will own approximately 76.5% of the combined company, and Redbox stockholders will own approximately 23.5% of the combined company, on a fully diluted basis.

With CSSE trading at $7.28 the acquisition value of RDBX ~$0.63, however the current stock price is $3.73.  In order for the current stock price to be justified based on the acquisition ratio, CSSE would need to be trading $30.80.  

There is no shareholder approval risk to the deal

The majority of stockholders for both RDBX and CSSE have already approved the deal.  

Redbox stockholders holding approximately 86% of the Redbox voting power have entered into a voting agreement to approve the transaction. Chicken Soup for the Soul Entertainment stockholders holding approximately 91% of the voting power of Chicken Soup for the Soul Entertainment have delivered a written consent approving the transaction.

The transaction is expected to close in the second half of 2022, subject to the receipt of required regulatory approvals and other customary closing conditions. Upon closing, the combined entity will retain the name Chicken Soup for the Soul Entertainment and will continue to trade under the ticker symbol “CSSE” on the Nasdaq stock exchange.

On the CSSE conference call they reiterated that they expect the deal to have no roadblocks.

In terms of the deal itself, we are [Indiscernible] the majority shareholder of Chicken Soup for the Soul, who happens to be speaking, has approved the deal, as has the majority shareholder of Redbox. So we expect to go through the regulatory process quickly with customary closing conditions, but [ we'll make this ] deal close in the second half of 2022. And both Galen and I are really committed to doing it as quickly as we can. We want to bring these companies together as fast as possible because we're excited about what we see.

RDBX is insolvent and would declare bankruptcy absent this deal

RDBX had no viability as an independent business.  They had severe liquidity concerns with only 13M of cash on the balance sheet at the end of 1Q22, and $141.8M in current liabilities vs. 62M in current assets.  

They had $14.8M in operating cash flow losses in the 1Q22.

With effectively no liquidity they were forced to go to their lenders and ask for additional liquidity so they could run a sale process.  On April 15th they reached a sixth amendment to the Credit Agreement, which dictated that they would have to reach a sale of the company or the assets by May 10th to get access to additional cash.  

And of course on May 10th, 2022 they were able to hit their deadline and entered into the merger agreement with CSSE.  

Catalyst

Completion of the merger