Dark stock Questar turns into special situation

I own a number of microscopic positions in dark companies that trade on the pink sheets and that seem to offer no information at all to investors. Every now and then I manage to get some financial information from a company, but often I’m simply ignored.

Friday I noticed that the stock of one of these companies, called Questar Assessment (OTCMKTS:QUSA), had exploded. Questar is a K–12 assessment solutions provider. Shares that were trading for $0.30 in the weeks before the announcement were now selling for more than $2.00 on enormous volume. OTCMarkets.com did not show any news, but Questar’s website did show this press release.

The company is being acquired by Educational Testing Service (ETS) for approximately $2.80 per share:

ETS will acquire Questar for approximately $127.5 million subject to certain adjustments as set forth in the transaction agreement. Holders of Questar common stock are expected to receive approximately $2.80 per share in the transaction.

The press release also appears on the website of ETS and on PRNewswire.

I did feel disappointed when I saw the announcement, because I was not able to obtain information in time to make a true investment decision about this company. Thinking about it a little more, perhaps there was very little chance for me to get any information anyway. Questar’s shares have been trading below $0.50 for years. There is such a large gap between the share price and the takeover offer that I suspect the company did not share any information with its shareholders. I could be wrong though. Perhaps there were some enterprising investors out there who did manage to get information and who were able to build up a meaningful position in the $0.40 – $0.50 price range. They will be up at least 600% now.

Merger arbitrage

I do think this situation is still interesting for investors, because Questar shares are currently trading at $2.54, offering a 10.2% spread to the takeover price of $2.80.

The main problem is that there is very little information available currently. The press release notes that the purchase price “is subject to certain adjustments as set forth in the transaction agreement”, but investors don’t know which adjustments can be made. Also, there is no mention of an expected closing date in the press release, so investors don’t have a good idea about when they will receive the $2.80. The press release also doesn’t explicitly say that shareholders will receive the consideration in cash. It does seem very likely to me that QUSA holders will receive cash, since ETS is a non-public organization. I have seen a few weird deals on the pink sheets though, where investors got some unusual securities in exchange for their shares.

And obviously, the transaction has to actually close. I have no good idea what the risk is of this transaction falling apart. I don’t expect that shareholder approval from Questar shareholders will be a problem, given the extremely large premium that is paid. There could be financing risk on the side of ETS. ETS is a non-profit organization, perhaps they will need to obtain financing to complete this deal. That could be a problem.

In summary: there’s still a lot of uncertainty about the terms of this deal and if/when it will close. That probably explains the relatively large spread. This situation reminds me a bit of the Kahala Brands transaction, although that proved to be juicier. I do think that situations like this can be pretty attractive, because selling shareholders tend to leave some money on the table. They are being offered an enormous premium to the market price and many of them might not even have obtained recent financial information from the company. Suddenly their stock explodes in value and it is suddenly a much larger position in their portfolio. It is only prudent to then take some money off the table, which creates sellers that are relatively price insensitive.

It’s a speculative situation, because I don’t even have financial information about Questar, but I did end up buying a small position at around $2.52. I don’t think you should look at these special situations in isolation too much, but to consider them more as a basket. As such, this merger arbitrage idea is probably substantially riskier than average, but it also offers a much larger than average spread.

Disclosure: long Questar Assessment, Inc. (OTCMKTS:QUSA)

Posted in Pink Sheet stocks, Special situations and tagged .


  1. The transaction closed and I received the cash yesterday. The consideration per share was $2.7276, so it was adjusted downward a little from the expected price of $2.80. That was a bit disappointing, but it was still a 5.9% return on my investment in two months (I bought some more after this post).

  2. You might still receive a little bit of money, although I wouldn’t directly bet on it. The amount paid to shareholders was based on an estimate of the amount of working capital and debt at Questar immediately before closing the transaction. If this estimate turns out to be too low shareholders will receive an additional payment.

    And there might have been an incentive for insiders to estimate this a bit too low, since preferred holders had agreed to put a part of the money in escrow that will be used to pay ETS in case the estimate was too high (while shareholders would not have to pay anything in this case). Since insiders owned mostly preferred stocks and would be on the hook to pay in case the estimate would be too high, it might have been estimated a little bit low. We’ll see if maybe a little bit more money is coming…

    • Thanks! It makes sense for them to be pretty conservative with their estimate. It would be a nice surprise to see a bit more cash coming at some point.

Leave a Reply

Your email address will not be published. Required fields are marked *