This is the weekly Merger Arbitrage Performance Review – June 14, 2020. This report focusses on BITA, BREW, TIF & FSCT arbitrage spreads during the period 8th June – 12th June. These stocks are selected from the top 20 investable US cash based merger spreads, a list of the largest pending cash merger arbitrage spreads available as at 7th June compiled by Merger Arbitrage Limited. Investors and traders can follow our latest Top 20 (T20) list each week here. Regular followers will already be familiar with our rules for inclusion on the T20 Index.
Following the performance table of investment returns, the first section of this report compares and reviews the performance of the broader market with the MNA. Then we more specifically discuss the performance of the overall T20 Index. The next sections detail the biggest winners & losers from the T20 portfolio followed by the conclusion. The information contained in this weekly Merger Arbitrage Performance Review – June 14, 2020 assists traders in making merger arbitrage investments and event driven trading decisions. Click this link for the archive of spread performance reviews from previous weeks.
Additional live news updates for these deals can be found on our customized T20 Index news feed. Even more specific merger details & news can be found on the dedicated news and merger factsheet pages including popular deals such as TKAYF & GRUB, TECD & TIF.
Table of Returns
Merger Arbitrage Performance Review - June 14, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 1.64% | SPY | 4.74% |
| Index Dispersion | 7.92% | VIX | 47.19% |
| Winners | 6 | MNA | 2.74% |
| Losers | 13 | ||
Market Performance Review
The broader market was snapped back into reality last week as the Federal Reserve issued a cautious economic outlook. By announcing rates will be kept on hold through 2022 many market observers readjusted their analysis of how soon the recovery will have a noticeable effect on the lives of ordinary Americans. Coupled with a slight increase in new infections of COVID-19 triggering the fear of a second wave, and a dose of profit taking, the market succumbed to its worst weekly performance since the pandemic began. By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was firmly in the red finishing lower by 4.74%.
The VIX unsurprisingly rose dramatically during the same period as sentiment deteriorated. By Friday, the index had risen by 47.19%.
The IQ Merger Arbitrage ETF (MNA) also finished in the red for the week, mostly mirroring the performance of the broader market. However, losses were experienced in Taubman Centers (TCO) as the deal with Simon Properties (SPO) fell apart. By the close on Friday, the IQ Merger Arbitrage ETF was down 2.74%.
We continue to repeat the following section from our previous analysis
It is important for traders of merger arbitrage to consider how each of their individual positions will be affected by a continued spread of the coronavirus.
- How can this affect the granting of regulatory approval in China?
- Are delays inevitable?
- Will a slowdown in the global economy lead acquirers to rethink their acquisition strategy?
- Are individual merger arbitrage stocks still supported by higher floor prices now that the market kas moved lower?
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads took a hit this week as the broader market went into tailspin. What had looked like a recovery especially in the hospitality sector came to a halt as Red Robin Gourmet Burgers (RRGB) announced disappointing results. Familiar names such as Fitbit and Tiffany & Co. also took a hit. Bitauto (BITA) provided some joy and demonstrated deals could still be made as it announced (finally) a definitive merger agreement.
The T20 index closed down for the week by 1.64% with RRGB providing the majority of this loss. The losers beat the gainers by a margin of 13 to 6 with 0 non-movers and 1 cash position. The standard deviation of the individual index returns remained at an elevated level as a result of the outsized loss posted by RRGB. This week’s figure was recorded as 7.92%. This keeps the number above both the short term average and medium term average figure. The index was comprised of an incomplete complement of 19 merger arbitrage cash deals and 1 cash position.
Merger Arbitrage Performance Review - June 14, 2020
Bitauto Holdings (BITA)
Bitauto had some good news to share with merger arbitrageurs Friday. Despite announcing Q2 earnings being light of EPS expectations on the same morning, the company also revealed having entered into a definitive merger agreement with a consortium led by an affiliate of Tencent Group. We had previously spoken of the geo-political tensions affecting the merger spread in this deal and the length of time being taken to finalize a deal. However, an agreement is now in place to take the company private at $16 per ADR.
With the stock closing at $15.70 on Friday afternoon up $1.81 or 13.03%, the simple spread stands at 1.91%. The deal is currently expected to close in H2 2020. If we take the mid-point of this date range we get an annualized spread of approximately 6.7%. In light of the current economic climate and political situation we have exited our position. Although we continue to believe this deal will consummate successfully, a delay or deal extension risk could reduce that annualized figure significantly.
Craft Brew Alliance (BREW)
BREW also moved forward this week as the market continues to react positively to the actions taken by BREW and BUD in relation to addressing the DoJ competition concerns. By actively seeking a buyer for the Kona Hawaii business, the market continues to put faith in the deal being consummated as expected. The stock moved up $0.18 or 1.18% to $15.39. The leaves the simple spread at 7.21%.
The expected completion date is unchanged from the previous guidance of “the transaction is expected to close in 2020“. Therefore is it very possible should the disposal go through sooner rather than later the deal may close in the next few month and produce an attractive annualized return. In a change of opinion from previous analysis, we will look to initiate a position in this stock during the coming week.
Forescout Technologies (FSCT)
Last week we learned the irregularity referred to by Advent was a “channel stuffing scheme” which involved Forescout Technologies and a company called Merlin. This caused the stock to move sharply lower. The latest development is a public denial by Merlin of any wrong doing. Some market observers adjudged this was the reason for a minor rebound in FSCT’s stock price on Friday following a decline throughout the week. However, on closer inspection the stock moved broadly inline with the wider market. It would have been strange for Merlin to issue a statement saying anything else than they did. In this case, a denial of any wring doing. Thus we assume this had little effect on the stock price.
Despite Friday’s rebound, the stock had finished down for the week by a further $0.64 at $22.54, a fall of 2.77%.Although the simple spread may look tempting at 46.93%, we are not looking to take a position in this stock.
Tiffany & Co. (TIF)
It’s been a tough time for Tiffany & Co. recently. Speculation continues as to whether LVMH are looking to renegotiate the deal. However a disappointing set of results announced Tuesday morning still managed to send the stock higher throughout the day. Possibly due to the following except from the accompanying press release
Mr. Bogliolo finished his comments by saying: “For these reasons, and as I stated earlier, I am confident that Tiffany’s best days remain ahead of us and I am excited we will be taking that journey with LVMH by our side. On the topic of the merger, we are pleased that there has been additional progress with the antitrust / competition process in the last few weeks; notably, we obtained clearance last week for the transaction from the Federal Antimonopoly Service of Russia and were notified in late May that the Mexican competition authority has declared our filing to be complete.”
With no mention of any communications with LVMH, investors took the “no news is good news” approach and, for the day at least, sent the stock higher. That is, until Wednesday when the price returned to the pre-earnings level despite UBS stating TIF was in compliance with its debt covenants obligations. Perhaps the mere mention of this subject is enough to raise investor concerns during such a volatile period.
However, without concrete evidence and only media speculation of a potential renegotiation, we will maintain our small positon which we recently entered into. At the close on Friday, the stock had fallen $2.87, or 2.35% to $119.12, the deal is now offering a simple spread return of 13.33%.
