Redbox Entertainment Inc. shares were roaring leading up to a merger deal with Chicken Soup for the Soul Entertainment Inc., and they’ve remained hot since the all-stock acquisition was announced in mid-May.
That has one analyst urging caution.
B. Riley Securities analyst Eric Wold downgraded shares of Redbox RDBX, +4.72% to sell from neutral Friday, writing that the stock’s roughly 100%-plus rally since the deal announcement doesn’t align with the terms of the acquisition. Chicken Soup for the Soul shares had dropped around 13% since the deal announcement as of the publication of his note.
Wold was bullish on Redbox’s stock prior to the merger announcement, but given that controlling shareholders from both companies have signed off on the deal and that regulators are unlikely to oppose it, he said that Redbox “should no longer be valued on its own merit.”
The terms of the deal stipulate that Redbox shareholders would get 0.087 shares of video-content company Chicken Soup for the Soul Entertainment CSSE, +2.25% for each share of Redbox that they own.
“At the Thursday closing price for CSSE of $6.22, RDBX shareholders would receive CSSE shares worth ~$0.54 (or only about 7% of the current RDBX trading price),” Wold wrote. “In other words, we believe for the current RDBX stock price to make sense, CSSE shares would need to move higher by nearly 1,300% to $86.78.”
Wold has a $26 price target on shares of Chicken Soup for the Soul, a target that he said could support a roughly $3-a-share valuation for Redbox based on the terms of the deal. But he also sees the possibility that Chicken Soup for the Soul shares fail to reach that 12-month target ahead of the expected deal close in the second half of 2022.
“And even if we assume CSSE shares can recover to 50% of our $26 PT by transaction close, this would still only lead to a valuation of ~$1 for RDBX—which is our new [price target] under this scenario (something that may still prove to be too high),” he wrote.
Wold acknowledged that Redbox has been the subject of “retail investor interest and ‘meme’ speculative trading,” which he said could drive more volatility in the shares and send them even higher. Still, he expects that “the valuation will ultimately correct itself” before the deal closes.
He continues to have a positive view on Chicken Soup for the Soul and the prospects for the combined company. Chicken Soup for the Soul could leverage Redbox’s kiosks and loyalty program “to further penetrate the value-conscious demographic,” while also helping Redbox’s ad-supported streaming offering, Wold wrote.