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, or large red vending machines. Like other consumer-facing companies that tap into retail trader nostalgia—like GameStop, AMC, Bed Bath & Beyond, Blackberry, and even Blockbuster—Redbox is just another momentary Wall Street meme. At least this one has an expiration date when the deal closes.
Those attributes are all bad for, like, rational stock value, but good for memes:
Trading the dumbest meme stock is much funnier than trading the forty-sixth-dumbest meme stock. Redbox is a very funny meme stock! If you tell a traditional finance person “I am buying GameStop at $300,” they will say “hmm that seems high I dunno.” If you tell them “I am buying Redbox at $12.89” they will sputter and twitch and try to prove to you with math that it’s a mistake. That’s funnier!Having an expiration date makes this game more exciting and sillier. The problem with a regular meme stock is that eventually people will get bored; the finite expiration date here limits that risk. The game has to end, and when it does, someone will be holding quite a bag. It creates more immediate danger and excitement than a meme stock that could keep going up forever.Also to be fair once the deal closes you could aways meme up the Chicken Soup stock, why not.
The other lesson is that the essential condition of a meme stock is limits to arbitrage. Any reasonable person would look at this price action and say: “I should short 1 million shares of Redbox for $9.47, collecting $9.47 million; then I should buy 87,000 shares of Chicken Soup for $7.31, spending $636,000, and then when the merger happens I will deliver those Chicken Soup shares to close out my short and keep my $8.8 million of nearly risk-free profit.” But a sensible person would have said that back when Redbox was trading at $2.58 last month, and if they had done that trade then, it would have moved against them by millions of dollars by now and they probably would have been liquidated at a huge loss. Because there is no cap on the price of a meme stock, it is risky and unpleasant to short one, and there is at least one high-profile case of a multibillion-dollar hedge fund closing down due to excessive shorting of meme stocks. Why bother, on a stock this small? (Also, relatedly, stock borrow in Redbox is scarce and expensive, so it’s not exactly easy and costless to do this trade. Also, I mean, the merger could fall apart.) And so there are meme-y buyers to push Redbox up, and no rational sellers to push it down, and the price spirals up.
The advanced move here would be for Redbox to do an at-the-market offering, selling a bunch of shares for $9.47 each to raise extremely cheap cash for its soon-to-be owners at Chicken Soup. I think that would be a bit too much? Other meme stocks have done at-the-market offerings, and the US Securities and Exchange Commission has grumbled but allowed it. The SEC doesn’t like it when companies sell shares to excited retail investors for more than they’re worth, but it can’t really police that; worth is subjective, and you can’t prove that the shares are selling for more than they’re worth. Doing an at-the-market offering at $9.47 when you’ve signed a merger agreement to sell for $0.69 probably goes too far though.
-from a Bloomberg Money Stuff email |
