This is the weekly Merger Arbitrage Performance Review – September 20, 2020. This report focusses on BREW, TIF, FIT & WMGI arbitrage spreads during the period 14th September – 18th September. 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 13th September 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 – September 20, 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 CAIXY–BNKXF, IMMU, TDOC–LVGO, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - September 20, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 2.15% | SPY | (0.62)% |
| Index Dispersion | 5.04% | VIX | (3.87)% |
| Winners | 13 | MNA | 1.09% |
| Losers | 4 | ||
Market Performance Review
The broader market extended its decline for the third week in a row as once again tech stocks came under heavy selling pressure. Despite almost 7 out of each 10 stocks in the S&P 500 index showing positive returns for the week, the overall performance was still negative. This shows the dominance of the tech industry within the index. We consider it important for analysis purposes that investors are aware of this ever increasing imbalance within the sectors of the S&P 500.
This performance comes against a back drop of steadying unemployment numbers, rising retail sales and a six month high in the University of Michigan Consumer Sentiment Index. On top of this, the Fed has indicated it will keep interest rates at a near zero level through 2023. However, the volatility of this profit taking should come as no surprise following the 50%+ increase in the broader market and an almost 100%+ rise in household tech names since the lows in March.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was lower by 0.62%. The VIX also decreased and by Friday had fallen by 3.87%. However, the IQ Merger Arbitrage ETF (MNA) rallied once again proving the diversification benefits of an alternative investment strategy. Livongo (LVGO) was a significant gainer whilst being supported by Tiffany & Co. (TIF). By the close on Friday, the IQ Merger Arbitrage ETF was up by 1.09%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Portfolio, unlike the broader market however performed strongly during the week. This was in large part due to the continued recovery in RRGB and an announcement late on Friday afternoon stating the takeover of BREW by Anheuser-Busch InBev (BUD) has received regulatory clearance.
However, the outlook for merger arbitrage continues to be mixed. New deals of various sizes and payment types have been announced, but it is suspected that these deals may have already been in the pipeline and therefore do not represent a current analysis of the economy. The upcoming U.S. election however may provide fresh impetus especially if wall street financiers anticipate a significant change in policy.
The T20 index closed up for the week by 2.15% with RRGB providing a significant gain. The index was comprised of an incomplete complement of 19 merger arbitrage cash deals. The winners were triumphant by a margin of 13 to 4 with 2 non-movers. The standard deviation of the individual index returns was 5.04%. This figure is above both the short term average and the medium term average figures.
Merger Arbitrage Performance Review - September 20, 2020
Craft Brew Alliance (BREW)
BREW finally delivered the long awaited news that all traders had been hoping for. In doing so, the stock became the second best performer in the T20 Portfolio over the past week. An announcement late on Friday afternoon stated the DoJ had cleared the deal. Approval of the takeover was conditional on the divestiture of the Kona brand. In a press release the companies said
closing was expected in the coming weeks
This is compatible with the previously guided tentative expected closing date being in the third quarter of 2020 when discussing the divestiture. The stock moved up an additional $0.85 or 5.44% to $16.47, just $0.03 off the offer price We have now exited our position and will celebrate accordingly. Cheers.
Tiffany & Co. (TIF)
Tiffany & Co. continued its volatile ride of late and once again featured in the largest movers of cash merger arbitrage spreads. We’ve written extensively about this deal already but during the past week on Wednesday, an SEC filing by TIF noted
Tiffany & Co. (NYSE: TIF) today responded to the opposition filed today by LVMH Moët Hennessy-Louis Vuitton SE (“LVMH”) to Tiffany’s motion to expedite its lawsuit in Delaware Chancery Court. LVMH asked the Court to hold the trial in six or seven months. Tiffany also corrected multiple inaccurate statements by LVMH regarding the Merger Agreement between the parties.
The 8-K filing goes on to list a number of points as to why the deal should consummate as arranged and that there is not an argument from LVMH to be made.
It appears that LVMH’s case rests on the issue of language used. An “order” from the French Government means LVMH are not required to close the deal. Whether this is what was received by LVMH will be a matter for the courts. What we suspect here however is that there could be additional involvement from the French government that has not yet been disclosed. This is speculation on our part, but Tiffany’s language suggests they are adamant its a done deal. Whereas LVMH appear to be somewhat blasé about the matter as if they know something we don’t. We repeat, this analysis is speculative on our part.
We still believe the most likely solution then is negotiation and possibly a lowering of the offer price. However, on Friday, LVMH confirmed it has submitted the deal to the European Commission for approval after an anti-trust review thus continuing its obligation to advance completion of the deal.
With this in mind, and following a slight recovery in the stock price we have decided to lower our position. As we added to the position previously we are happy to take some money off the table. This also gives us the flexibility of re-entering the stock is the opportunity arises. By the end of the week, the stock had risen $3.03 or 2.66% to $116.26. This return calculation includes the dividend payment of $0.58. The deal is now offering a simple spread return of 15.54%.
Fitbit (FIT)
Fitbit was also another top performer this week. Despite there being no significant deal news, traders seeking refuge from the tech sell off looked to alternative investments for safety. Despite a $0.06 setback on Friday, by the end of the week the stock finished higher by $0.08 for the week, a rise of 1.27%. This leaves the simple spread at 15.38%. We will continue to hold even if the deal does take longer to close and we have to extend our forecast completion date.
Wright Medical (WMGI)
Wright Medical was also amongst the biggest winners this week. The firm had previously announced the extension of the closing date to the tender offer from Stryker (SYK) to September 30. In a regulatory filing with the SEC this week detailing the upcoming annual general meeting, the firm briefly referred to the deal
The Offer is currently scheduled to expire at 5:00 p.m., Eastern Time, on September 30, 2020, but may be extended in accordance with the terms of the Purchase Agreement. The closing of the transaction is subject to receipt of applicable regulatory approvals, the adoption of certain resolutions relating to the transaction at an extraordinary general meeting of Wright’s shareholders (which condition has been met), completion of the Offer, and other customary closing conditions.
In the meantime, the stock was up $0.30 at $30.56, a rise of 0.99%. This leaves a simple spread of 0.62% for a deal, which following the recent CMA announcement now looks certain to close. We have no position.
Nil point!
See you next time 🙂
