This is the weekly Merger Arbitrage Performance Review – April 26, 2020. This report focusses on BITA, FIT, KEM & TIF arbitrage spreads during the period 20th April – 24th April. 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 19th April 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 discusses the performance of the overall portfolio. Then we compare and review this performance with the IQ Merger Arbitrage Exchange Traded Fund (ETF) – MNA and the broader market. 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 – April 26, 2020 assists traders in making merger arbitrage investments and trading decisions. Click this link for the archive of spread performance analysis from previous weeks.
Returns Table
Merger Arbitrage Performance Review - April 26, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.79% | SPY | 1.31% |
| Index Dispersion | 2.22% | VIX | 5.82% |
| Winners | 11 | MNA | 0.86% |
| Losers | 7 | ||
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads continued their recovery during the week. Now extending into a three week winning run, the market appears to have returned to a sense of normality following the extraordinary widening of spreads previously. However, as spreads continue to narrow as deals trend towards closure, new acquisitions are not being announced to take their place. In light of this, we will soon be announcing our coverage of stock swap deals to complement our coverage of cash deals.
The T20 index closed up for the week by 0.79%. What was previously described as a shock has now happened two weeks running. The gains made this week were NOT primarily attributable to RRGB! Instead, BITA takes first place this week supported by KEM, FIT, & RESI. This time out, the winners eased past the losers by a margin of to 11 to 7 with 2 non-movers. The standard deviation of the individual index continued to subside during the past week and settled at 2.22%. Traditionally seen as a high number, this level is now below both the short and medium average readings. For now at least, the index was comprised of a full complement of 20 merger arbitrage cash deals and 0 cash positions.
Market Performance Review
The IQ Merger Arbitrage ETF (MNA), endured a gentle decline throughout the week. A significant holding in Tiffany & Co. (TIF) was enough to drag the ETF lower despite the strong performances in KEM & FIT. (BITA is not currently being held in the ETF). By the close on Friday, that decline saw the IQ Merger Arbitrage ETF close down 0.86%.
The broader market had a rather more choppy experience during the week. A rally in the second half of the week wasn’t quite enough to reverse early significant declines. Investors were initially scared off as oil prices turned negative (YES, NEGATIVE!) signaling additional pressure and weakness in the global economy. However, the latest rescue package signed into law by President Trump providing funds to small businesses and hospitals offered some relief to the markets despite the continuing escalation in jobless claims. As some states look to re-open, some experts warn of a second wave of the COVID-19 pandemic. By the end of the week, the SPDR S&P 500 ETF (SPY) finished lower by 1.31%.
The VIX unsurprisingly continued to fall from its recent highs. Although by Friday, the index had only declined by 5.82%.
The effect of COVID-19 continues to permeate around the globe. Travel stocks especially, which we discuss in greater detail in our latest article Covid-19 and Merger Arbitrage Trading, continue to be particularly hard hit.
In light of popular feedback from previous postings (thank you very much) we shall 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?
- Also important is that merger arbitrage stocks which were supported by higher floor prices may now have some of that protection removed.
Merger Arbitrage Performance Review - April 26, 2020
Bitauto Holdings (BITA)
Deals with Chinese connections also continue to experience high volatility and once again Bitauto (BITA) finds itself as the largest gainer for the week. All this despite there being no new deal news or regulatory filings. As China begins to open up parts of its country and economy following the COVID-19 outbreak, it is natural that stocks with Chinese connections will tend to outperform. The stock closed up for the week at $11.79. A rise of $0.83 or 7.57%. This leaves the merger arbitrage simple spread at 35.71%. We remain holders of our small position in this stock and expect to continue to do so for the foreseeable future.
Kemet (KEM)
Kemet provided some good news this week as the company announced it had received clearance from Committee on Foreign Investment in the United States (CFIUS). This news follows on from the previously announced approval from the Taiwan Fair Trade Commission (TFTC). In a press release issued on April 24th, the company went on to say
The parties continue to expect the transaction to close in the second half of 2020 with the goal of closing by the end of the third quarter of 2020, subject to additional customary closing conditions and the receipt of the remaining required regulatory approvals, which include approvals under the Anti-Monopoly Law of China and approval from the Investment Commission, Ministry of Economic Affairs in Taiwan.
This announcement may in part explain part of last week’s movement as traders speculated on a regulatory announcement. This week, the stock moved upwards by $1.14 to $26.77, a rise of 4.45%. We no longer have a position in this spread. Having took a very small position following our previous analysis we reasoned this latest rise was sufficient to take some money off the table. The simple spread now stands at only 1.61%. With regulatory approvals still required in the Far East (although there is no reason to expect them not to be granted) we believe that does not leave much meat on the bone.
Fitbit (FIT)
Fitbit posted a strong performance this week. Following last week’s small decline the stock has rebounded well during a lackluster week for the broader market. With no new deal news announced we imagine this was a case of bargain hunters returning to the merger arbitrage space or the possibility that an announcement is due soon. Should this be the case, we will update readers via our twitter feed. By the end of the week the stock finished down by $0.22 at $6.89, a rise of 3.30% leaving the simple spread at 6.68%.
We have written extensively on FIT in the past and also advised readers how we took a small position at the $6.50 level. Despite this recent rise, we are in no rush to sell even if the deal does take longer to close than originally forecast. A risk we prepared for when originally buying the stock.
Tiffany & Co. (TIF)
Tiffany & Co. (TIF) is the clear loser this week. The stock fell throughout the week following the announcement that Sycamore Partners notified L Brands that it is terminating the deal to acquire a stake in Victoria’s Secret. Although this action has not yet prompted analysts to call the Tiffany deal into question, is has forced some traders to consider the overall risk to their portfolio following the COVID-19 outbreak. In the meantime, the date for the Annual General Meeting has been set for June 1, 2020. Note: this meeting is not to vote on the proposed takeover by LVMH.
However, following the $2.80, or 2.17% decline in the stock to $126.35, the deal is now offering a simple spread return of 6.85%. Assuming the deal closes later on in the year, it should allow for at least one more dividend payment. This could help boost the annualized return to around 30%. Early closing may of course increase this annualized return but at the same time could potentially reduce the number of dividends paid and thus reduce the return. Even though we believe the possibility of this deal falling apart is extremely low, even at these levels, we do not consider this deal to offer a sufficient return worthy of an investment.
