How to make easy money from the acquisition of Great Plains Exploration?

Is there such a thing as easy money?  Depends what “easy” means for you! Follow me and I will present what I believe to be a potential opportunity for you.

At the end of September, Avenir Diversified Income Trust (TSE:AVF.UN) acquired Great Plains Exploration (TSE:GPX) for about $0.48 a share or an exchange of 0.088 share of AVF for each share of GPX.

Following the closing of the acquisition, Avenir will be an energy trust with a balanced 50/50 weighting in oil and gas with decent hedges in place to protect cash flow. It currently pays $0.06 monthly dividend per share and will be paying $0.045 monthly distribution per share starting on January 2011 following its conversion to a dividend paying corporation.

Potential Easy Money Part 1

GPX’s share price has gone up following the announcement from $0.44 hitting $0.50 yesterday while AVF’s share price rose from $5.40 to hitting $6.00 yesterday. If you buy 10,000 shares of GPX at $0.50, you will be able to exchange them for 880 shares of AVF which means that each share of AVF would have cost you $5.68.

$5000 / 880 = $5.68

With the share price of AVF currently trading at $6.00 you just made yourself +5.63% in profit. The deal is expected to close on or before November 30, 2010 as such you will also be eligible to receiving a dividend payment of $0.06 for each share paid on December 15, 2010.

Potential Easy Money Part 2

AVF believes the dividend of $0.045 is sustainable going forward in January 2011. A $0.54 yearly dividend comes out to 9% yield on a yearly basis which is higher than the average dividend being paid by its peers. It is expected that AVF’s dividend will fall in line with its sector peers at %6 or %7 per year.

In order to reach a %7 yield the share price will have to rise to $7.71 which is +35% above your entry price if you buy into GPX today and convert the shares. Of course you have to act fast before the deal closes.

The Risks

There’s no free lunch without a catch right? The catch here comes out as 2 risks:

The acquisition is aborted. (Extremely small chance of that happening in my opinion)

Economic uncertainty: (For example the impact of a correction hitting the market is unknown as the extent of the correction is difficult to predict)

With the risks defined the return seems decent in part 1 for the short holding period required and very lucrative in part 2 if you decide to stay the course over 2011 not counting what you’re getting paid monthly while you hold.

Final Thoughts

I already hold shares of GPX bought way earlier and shares of AVF that I bought following the announcement. I would simply love to buy more GPX into my TFSA account and go through the whole scenario described above. I am still looking into digging funds up for that!

The scenario above is just my opinion and is in no way an encouragement to buy or sell the fore mentioned securities. If you think there is a flaw in my scenario, I would love to hear from you!

What do you think dear Reader?