What’s going on with Centennial Communications (CYCL)?

As manager of the MANDA fund—a portfolio composed of companies that are in the process of being acquired—I feel it’s my fiduciary responsibility to comment on the recent downward price swings in the stock of Centennial Communications (CYCL). Not that there is much to say other than that the merger date with AT&T (T) was pushed into the third quarter because of customary regulatory hurdles.

The merger was announced 11/10/08 at a take-over price of $8.50 per share. I purchased it that day for $7.80. Since then, the stock price has been relatively stable reflecting the fact that most folks believed that the deal would go through without any hitches…that is, until recently.

Centennial shareholders approved the deal back in February and all that was left was for it to clear regulatory and anti-trust issues with the FCC and DOJ. It was expected to clear those by the end of 2Q 09. But that didn’t happen, and it was on July 1st when the price of Centennial stock began to roll-over.

On July 8th both companies issued press releases saying that the deal was pushed back to the third quarter, but they didn’t mention foreseeing any problems with the government.* But jitters were already setting in as the stock began to tumble from around $8.40 to $8.20 two days before the announcement. Volume began picking up as the price continued to drop. On July 14th a week later, the stock took a nose-dive, dropping 15% at its lowest point and closing the day off 10% on more than ten times normal volume. It was ugly for Centennial shareholders, like me.

I scrambled to find out what had happened but there was no news from either company nor from any of the ten analysts covering Centennial. There was, however, a lot of speculation that the sell-off was due to insiders acting on illegal information, hedge fund margin calls, or a merger arbitrage fund liquidation. I’m thinking that it’s probably one of the latter reasons as the SEC will be all over any hint of insider trading.

For right now, I’m holding on to my current position, but if the stock doesn’t turn around soon, I’ll be selling it. In the interest of full disclosure, I did buy a small amount of Centennial at $7.35 a couple of days ago. Assuming the deal does close as expected, that represents a 15.6% return on investment. It’ll be interesting to see how this trade plays out.


*One poster on the Yahoo! message board said that the FCC is having “issues” with Centennial’s holdings in Puerto Rico which may have to be divested for the merger to clear.

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