Virgin Mobile USA (VM) being bought by Sprint Nextel (S).  It is a stock deal with restrictions. Based on the terms (see snippet at bottom of this post), here’s how it would work out:

First, if your shares cost you $5.50 in the first place, to at least break even, S’s 10-day avg closing price ending 2 days before the deal closes must be between $4.02 and $5.17.  If it falls out of that range, I will not receive enough shares of S to equal the $5.50 deal price.

Trading prices on July 31, 2009: S: $4.00 and VM: $4.91.

If I buy at $4.91, a straight cash deal would have an arb gap of $0.59/sh.  Now, factor in the current price of S, and you can see it is $0.02 out of the money (($5.50 / 1.3668) - $4 = $0.02).  So the gap is lowered to $0.57.  If nothing else changes by close (4Q 2009 or early 2010 / see snippet below), then today’s prices equal a potential 11.6% ROI.

However, just like every deal, a lot can happen between now and then.  If I feel that S stock will stay in the $4.02 to $5.17 price range until then, I will make that 11% ROI.  The other issue is liquidity– I will need to sell my shares right away on the open market to realize any gain.  If, after the close, S tanks, I could be in trouble.

The risks are there, but my gut says worse case, I will break even on this one (making something less than 11% ROI, but something more than 0%).  I will be initiating a small simulated position today at $4.91/sh.  If I were investing real money, I would be investing 50% of what I normally put into a regular deal (eg. If I normally invest $2,000, I would only invest $1,000).

Each public stockholder … will receive Sprint shares having a 10-day average closing price equivalent to $5.50 per Virgin Mobile USA share, subject to the collar referenced below.

* The exchange ratio for public stockholders will be based on Sprint’s 10-day average closing share price ending two trading days prior to closing.
* The exchange ratio will be subject to a collar such that in no event will the exchange ratio be lower than 1.0630 or higher than 1.3668.

…

The transaction is expected to be completed in the fourth quarter of 2009 or in early 2010.

Full Press release from Sprint