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Now a Takeunder Target, There Is No Reason to Own Redbox Stock

  • Redbox Entertainment (RDBX) has agreed to be acquired by Chicken Soup for the Soul Entertainment (CSSE).
  • An all-stock deal, RDBX shareholders are receiving just 0.087 shares of CSSE for each of their shares.
  • Given that, even if you buy today, you’ll see a more than an 80% loss when the deal closes. The best move is to stay away.
A Redbox (RDBX) kiosk in front of a brick wall.

Source: Jonathan Weiss / Shutterstock.com

Other meme stocks may still have a few more “meme waves” in them. But in the case of Redbox Entertainment (NASDAQ:RDBX), chances are it has had its last hurrah. That is, in a few months, once its recently announced merger with Chicken Soup for the Soul Entertainment (NASDAQ:CSSE) closes, RDBX stock will cease trading.

Put simply, its days as a meme play and short squeeze play are numbered. Chances are it will not experience another to the moon move even as it has seen meme waves more than once since going public late last year, the latest one happening earlier this month.

Worse yet, this isn’t even a great takeover stock opportunity despite the pending deal. In fact, far from a takeover play, it’s instead a “takeunder” play. There’s no deal premium. Instead, shareholders in this DVD rental company will receive shares worth a fraction of its current trading price.

RDBX Redbox Entertainment Inc. $2.88

The Story With RDBX Stock Up to Now

Before diving into the deal details, let’s take a brief look at how Redbox ended up where it is today. Founded in 2002 in a time when Blockbuster was still a multi-billion dollar business and Netflix (NASDAQ:NFLX) had just gone public, it has had numerous owners throughout the years.

These include McDonalds (NYSE:MCD), Coinstar, and from 2016 until 2021, Apollo Global Management (NYSE:APO). Last year, Apollo merged the company into Seaport Global Acquisition, a special purchase acquisition company (SPAC). Following this SPAC deal, it became a publicly-traded independent company for the first time, debuting as RDBX stock.

After its debut, shares shot up in price. Yet, this wasn’t due to any enthusiasm about its declining main business. Instead, it became a meme stock, moving higher due to hype on platforms like Reddit. A lot of short sellers also made big bets against it. This was due to its declining business and bankruptcy risk. In turn, speculators jumped onto the other side of the trade in the hopes of driving a short squeeze.

However, its meme days are coming to an end. It’s also at risk of experiencing another sharp plunge.

Why Chicken Soup is Getting Redbox at a High Discount

During its meme heyday, RDBX stock traded for as much as $27.22 per share. It traded at double-digit prices as recently as May 2. So, why is it trading for under $3 per share today? The terms of its above-mentioned deal with Chicken Soup for the Soul.

Per the merger agreement, Redbox investors will receive 0.087 shares of CSSE stock for each of their shares. Based on CSSE’s current stock price of $5.37 per share at the time of this writing, that means just 46.7 cents per share. Why is Chicken Soup, which owns video streaming site Crackle and wants Redbox for its streaming assets, getting such a bargain?

While it’s paying a pittance to buy all of the RDBX common stock, it’s not fully a fire sale. Chicken Soup is also assuming its high debt position. This is the reason why this deal is happening under such extreme takeunder terms, as “Fintwit” personality and merger arbitrage expert Julian Klymochko put it in a recent tweet.

According to Klymochko, creditors force takeunder deals like this one. For Redbox stock investors (including Apollo), a fraction of something is better than nothing.

RDBX Shareholders Are Getting a Near Wipeout

Chicken Soup’s management is confident it will help create value for CSSE investors. Per statements made in the deal press release, the merger will result in $40 million in annual cost savings for the combined entity.

This is cold comfort, however, for those holding Redbox stock today. Once the deal closes, your position will lose more than 80% of its value. Some may still be willing to buy it at a big premium to the deal on the hopes of another squeeze happening. Due to the scarcity of shares to short and the high borrowing cost to short shares, a Reddit commenter has argued another squeeze is possible.

Still, don’t view the potential for one last squeeze as a reason to buy RDBX stock. Trading for more than six times the agreed-upon deal price, it’s already priced-in. From a risk/return standpoint, you are better off skipping this situation completely.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


Article printed from InvestorPlace Media, https://investorplace.com/2022/05/rdbx-stock-now-takeunder-target-no-reason-to-own/.

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