Image Entertainment/Q Black Media Merger Update

While there is no question in my mind that both parties want the transaction to close as soon as reasonably practicable, recent payment disruptions with Nyx have made it increasingly obvious that Q-Black Media lacks the financial wherewithal to consummate the transaction. Some have speculated that Q Black Media was exposed to Bernie Madoff, a situation which wiped out the financial resources backing the $100 million Equity Committent Letter. While this is certainly possible, a more reasonable explanation is simply that Q Black Media can't get the equity investors to committ. Irrespective, it is painfully obvious that Q Black is running into financing troubles. The market is currently pricing in over a 70% chance of failure; and given that shareholders have already voted in favor of the transaction, this fact essentially translates into a 70% chance that Nyx doesn't receive the money. Personally, I think the discount is overly pessimistic, especially since no one has any real information related to the financing. In fact, the only guidance we have is that a) Nyx has been stuggling to make the deposis and b) that they are committed to completing the transaction by March 20th. In my opinion, an unbiased estimate should be closer to 50%. While I consider this transaction especially risky there seems to be a good chance for profit should the transaction go through. If Nyx is able to obtain the necessary financing by March 20th, 2009, Nyx will pay $2.75/share in cash. The current per share trading price is $1.38, or approximately 50% discount from the cash consideration value. This translates into a 100% HPR return, or approximately 4800% annualized return (transaction could close in a week). If Nyx is unable to obtain the financing, Image will likely fall to $1 per share, which represent a 27% HPR loss, or approximately 1300% annualized loss. It will be interesting to see what happens.

Arbitrageur