Why Are Roku Investors No Longer Getting $160 a Share in a Bad Buyout?

It's been a wild week for Roku (NASDAQ: ROKU) investors. Shares of the smart TV operating system pioneer that soared 20% last Friday on reports of a potential buyout have fallen this week, despite an announced acquisition by Fox (NASDAQ: FOXA) on Monday.

Fox and Roku claimed that the definitive agreement values Roku at $160 per share, or approximately $22 billion in enterprise value. If you're wondering why Roku stock is trading below $140 right now -- a steep discount for a buyout expected to close in the first half of next year -- it's because the deal is now worth considerably less than the initial price tag. In fact, even before Monday morning's announcement, the deal was already worth slightly less than $160 per share. Let's break things down.

Image source: Getty Images.

Terms of endearment

The floor has never been $160. Even the initial ceiling wasn't that high. This is a cash-and-stock deal. Fox is paying $96 a share in cash -- technically, the floor -- as well as 0.9693 shares of Fox Class A common stock. The origin story of the initial $160 in per-share value was obsolete long before it was even announced. It was based on a volume-weighted average over a 10-day period that ended on Wednesday of last week.

Based on that math, Fox stock had a reference price of $66.03. A 0.9693 slice of that stock would work out to $64, combined with $96 in cash, for a total of $160. However, by Friday's close -- the last trading day before this week's announcement -- Fox stock had dipped to $65.85. This $160 deal was already marked down to $159.83 before it even left the gate. It was a slight dip, but the value would continue to erode as Fox stock slipped in the first three days since the trade was announced.

Data source: Yahoo! Finance.

Through Wednesday's close, the deal has cratered 9%, almost entirely due to Fox shares plunging 22% in the first three trading days since the acquisition was announced. The market obviously doesn't like the deal, but now Roku investors are feeling the pain, too.

Roku shares closing at $137.29 on Wednesday makes sense in that context. It's currently a 6% discount to a deal that isn't expected to close for another seven to 13 months. Given the volatile value of the stock component in the transaction, it's almost surprising that the gap isn't larger.

Knock on Wood

Rounding up potential rival bidders is a fruitless exercise, for now. Roku founder and CEO Anthony Wood is all in on this deal. He has accepted an ongoing role at Fox and a board seat once the acquisition closes. More importantly, he controls roughly 55% of Roku's total voting power. The only way Roku backs out is if Wood doesn't want that to happen.

It can happen, but many new factors would have to come into play. Would a rival bid be high enough to cover a premium to the current value of the Fox deal, as well as the deal termination fee? Is that theoretical offer more or less likely to face antitrust regulatory hurdles? Will that deal take even longer to close?

Roku deserves better than to be tethered to a media laggard with a sinking share price, but it signed off on this not-so-happily-ever-after ending to its story as a publicly traded, independent business. Despite roaring into the market fancy over the past year -- and putting out its best quarter in years -- it chose this path to closing credits without negotiating for a sequel.

If you're waiting to get bought out at $160 per share as Monday's press release pitched -- or even the initial wave of analysts pushing price targets even higher after the deal was announced -- you're in for a rude awakening. Not every stock story gets a Hollywood ending. Prices change. Regrets linger.

Rick Munarriz has positions in Roku. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.