In the most recent upset, Nyx Acquistion Co. has failed (yet again) to make a timely payment of an agreed upon increase in the business interruption fee. The payment disruption is yet another example of how Nyx has struggled to "finalize" financing with Q-Black, the elusive financier who provided the original equity committment letter back in Novemeber. Unfortunately, that equity "committment" seems to have dissappeared in the face of a "challenging economic climate and crisis in the financial markets." Oddly, the parties have remained relatively silent about the specifics of that statement, a situation which has left many investors questioning whether financing has been entirely wiped out or simply imparied. The recurrent payment disruptions would certainly suggest that it is the former, a fact that has seriously questioned the likelihood of the transaction closing. With Image now trading at $1.45/share, the Street is essentially pricing in an 80-85% chance of failure.
However, despite the recurrent payment hiccupps, Nyx and Image remain oddly committed to closing the transaction. On April 7th, 2009, for example, Nyx stated that it was in "continued support and committment to closing the merger." The statement was made in coordination with its failure to deposit a $1.5M business interruption fee. On March, 24th, 2009 Nyx made a similar statement when it indicated that "Although, this challenging economic climate has prolonged our ability to finalize the transaction we remain confident about bringing Image on-board and look forward to closing the deal." The statements, which are apart of string of similar statements made on March 7th, March 2nd, and February 12th, suggest that Nyx and Image are partially optimistic about the close, at least greater than the implied probabilities of 15-20%. In fact, Nyx's statements would seem to suggest that the financing troubles are only ephemeral, and its constant agreements to increase the business interruption fee would too. After all, Nyx has already agreed to increase the business interruption fee from $1.8M to $2.5M, and could stand to lose as much as $3.5M (assuming the $1M non-refundable deposit is made on April 10th) should the transaction fail. This amount represents nearly 5% of the $79M transaction value and over 10% of Image's current market capitalizatoin. This fact, of course, raises some interesting questions. For one, if Nyx truly believed financing was in jeopardy why Nyx would it continue to throw money at Image? Would'nt Nyx have simply abandoned the merger back in February or March? Maybe, Nyx knows something about financing, a fact that has kept it committed to the transaction. Or, maybe, Nyx just really wants Image (after all its not paying much. Plus I'm sure Image is more than happy to collect the hefty business interruption fees that Nyx continues to pay).
Nonetheless, the ultimate questions is still whether or not Nyx will come up with the money? If history is any precusor to the future, it probably won't (although, there is a good chance that it will cure shortly thereafter). Either way, Image remains an attractive acquisition target. Moreover, the return characteristics of the transaction are enormosly appealing. After all, Image currently trades for $1.45; Nyx has agreed to pay $2.75/share in cash; and, given that the S&P500 has increased about 20% since mid-March, the new downside low for Image is probably between $1.20-$1.30/share. Consequently, the risk/reward profile on this transction is compelling to say the least (about 4:1). If Nyx fails to make payment (which it probably will) the resulting downward move in Image's stock could provide an interesting entry point for those willing to bear the risk. Unfortunately, however, that risk could be pretty high.
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