This is the weekly Merger Arbitrage Performance Review – August 30, 2020. This report focusses on SINA, HUD, TIF & FIT arbitrage spreads during the period 24th August – 28th August. 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 23rd August 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 – August 30, 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 TDOC–LVGO, CVX–NBL, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - August 30, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 2.00% | SPY | 3.28% |
| Index Dispersion | 6.64% | VIX | 1.86% |
| Winners | 10 | MNA | 0.34% |
| Losers | 8 | ||
Market Performance Review
Domestic economic data was thin on the ground during the week but still the domestic stock market continued to forge ahead. The market has now posted a 50%+ recovery since the lows experienced in March. One of the main reasons for this continued rise is the statement from the Fed that inflation will be permitted to increase slightly. This means interest rates will remain lower for longer which in turn provides additional fuel to the stock market.
In addition to this, personal spending continued to increase and has now registered increases in the past 3 months. The robustness of consumer spending and the effects of the domestic economy have been a source of concern especially as the stimulus program continues to be debated. However, it appears the underlying figures are suggesting the consumer is providing a more robust recovery than previously suggested.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was higher by an almost unbelievable 3.28%. However, during the week, the VIX also increased and by Friday had risen by 1.86%. The IQ Merger Arbitrage ETF (MNA) also increased although on a much more subdued level. Vivint Solar (VSLR) was by far the biggest gainer in the index lifting the return into positive territory and cancelling out the negative performance of Grubhub (GRUB). By the close on Friday, the IQ Merger Arbitrage ETF was up by 0.34%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads, like the broader market also performed well during the week. This was in large part due to the rebound in RRGB following last weeks decline and was helped by a number of healthy increases in additional merger spreads.
The outlook for merger arbitrage continues to improve although remains mixed as new deals appear in a sporadic manner. A handful of industries continue to dominate the M&A landscape so we are yet to see any signs of a burgeoning full scale recovery. The increase in the broader market however would traditionally signal a rise in M&A activity especially deals being financed by acquirer stock.
The T20 index closed up for the week by an impressive 2.00% with RRGB providing a significant rise the restaurant and hospitality sector recovers. The index was comprised of an incomplete complement of 19 merger arbitrage cash deals. The winners beat the losers by a margin of 10 to 8 with 1 non-mover. The standard deviation of the individual index returns was 6.64%. This figure is significantly above both the short term average and the medium term average figure.
Merger Arbitrage Performance Review - August 30, 2020
SINA Corporation (SINA)
Sina moved higher this week and with the exception of RRGB was the weeks best performer. No new deal news was announced so we continue to await the recommendation of the special committee assembled by SINA to evaluate the non-binding proposal from New Wave, a company incorporated in the British Virgin Islands. It is as yet unknown when, if any details of these findings will be made public. In the meantime the stock has continued to drift higher in line with the broader market. The stock finished up $1.06 at $41.09, a rise of 2.65%. This leaves the simple spread at a discount of 0.22%. We are in no rush to open a position in this stock. Market chatter does seem to lean towards a higher justifiable acquisition premium from a superior proposal so we will continue to monitor this situation. We caution traders against employing a reverse arbitrage strategy in this instance.
Hudson (HUD)
Hudson is a recently announced deal that performed well last week. The offer is from Dufry AG Group, a 57.4% shareholder of Hudson, who wants to acquire the remaining equity interests for $7.70 in cash for each Hudson share. The stock finished up $0.10 at $7.58, a rise of 1.34% leaving the simple spread at 1.58%. We are yet to fully analyze this deal and therefore in no rush to open a position in this stock. However, initial analysis suggests there is a string likelihood of this deal succeeding due to the substantial toe hold.
Fitbit (FIT)
Fitbit was also a top gainer during the week. Despite there being no significant deal news, traders took advantage of the rise in the broader market to pick up stocks which have performed weaker than the rest of the market in recent times. Fitbit has been constrained by the EU Competition Commission investigation reducing the DCP. In light of the rising market traders have readjusted their risk/return profile for this deal and the price has moved accordingly. The stock finished higher by $0.08 for the week, a rise of 1.26%. This leaves the simple spread at 14.31%. We will continue to hold even if the deal does take longer to close than originally forecast.
Tiffany & Co. (TIF)
Tiffany & Co. saw its stock tumble on Tuesday morning as it announced the extension to the outside date as given in the merger agreement. This date has now moved to November 24 from August 24. Although no specific reason was given for the extension in the press release, it should be noted the acquisition by LVMH still requires regulatory clearance from the following competition regulators
- European Commission
- Japan Fair Trade Commission
- Mexican competition authority (Comisión Federal de Competencia Económica)
- Taiwan Fair Trade Commission
However, what appears to have concerned investors is a line from the same press release stating
LVMH has notified the Company that it reserves the right to challenge the validity of the extension of the Outside Date under the Merger Agreement.
This tone of language appears to suggest LVMH may not be as committed to consummating this deal as one might expect. The counter opinion of course is that LVMH have every right to make this challenge and it would be natural for them to analyse and review any action taken by a party that did not require the sanctioning of the other. Nonetheless, speculating on what a challenge to the date revision may mean leads us to have a reduced level of confidence in LVMH’s commitment. This was reflected in the price of the stock, which on Tuesday dropped over $5 as the deal closing probability declined substantially.
More news was announced on Thursday morning as Tiffany & Co. revealed Q2 results. Non-GAAP EPS of $0.32 beat forecasts by $0.15 and GAAP EPS of $0.26 beat forecasts by $0.02. This news was well received by investors and saw the stock rise by over 1% on the day. In contrast to the news earlier in the week, these results, and the accompanying bullish statement from CFO Mark Erceg, traders were able to conclude there was a reduction in the ability of LVMH to back out of the deal. The news of the results continued to provide positive momentum to the stock price which continued its recovery on Friday. However, by the end of the week, the stock had still declined $2.13 or 1.69% to $123.88. The deal is now offering a simple spread return of 8.98%.
Doubts about this deal first circulated following a report in Women’s Wear Daily stating the LVMH board of directors had met to discuss the takeover. This story arc has continued to permeate and be linked to subsequent news articles regarding TIF acquisition. Although that is not to say the point of view has no merit, but merely highlights how this point of view has persisted without any direct linkages to LVMH itself. That being said we do acknowledge this increase in risk this deal now entails. However, we are happy with our position in Tiffany and will continue to hold. With the aforementioned regulatory clearances still required, we expect stockholders will be entitled to receive the next dividend payment of $0.58. On current analysis, we still believe this merger spread to be attractive.
