This is the weekly Merger Arbitrage Performance Review – May 3, 2020. This report focusses on RRGB, WMGI, RESI & FIT arbitrage spreads during the period 27th April – 1st May. 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 26th 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 – May 3, 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 - May 3, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.40% | SPY | (0.04)% |
| Index Dispersion | 4.96% | VIX | 3.51% |
| Winners | 12 | MNA | 1.65% |
| Losers | 8 | ||
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads continued their recovery during the week although at a much reduced pace. These positive results now extend into a four week winning run. Deals continue to close, such a Mellanox (MLNX), whilst still no new deals are announced to replace them. In light of this, we will soon be announcing our coverage of stock swap deals to complement our coverage of cash deals. Speculation continues as to how many existing deals will survive as acquirers reassess the profitability of acquiring companies at previously higher valuations.
The T20 index closed up for the week by 0.40%. In a return to “normality” the gains made this week were primarily attributable to RRGB. AXE and WMGI also offered significant support despite a significant decline in RESI. This time out, the winners eased past the losers by a margin of to 12 to 8 with 0 non-movers. The standard deviation of the individual index continued to subside during the past week and settled at 4.96%. Two extreme movements this week, at opposite ends of the return spectrum have caused this figure to increase. This week’s reading is now below both the short but above the medium average figure. For what may be the penultimate time in the foreseeable future, 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 healthy rise throughout the week. A strong performance by Delphi Technologies (DLPH) played a significant part in the rise accompanied by Hexel (HXL). Whilst the hedging instruments in use had little effect on overall returns. By Friday, that rise saw the IQ Merger Arbitrage ETF close up 1.65%.
The broader market had a rather more choppy experience during the week. A strong performance until the middle of the week set the index up for another impressive rebound rally. However, disappointing economic news dampened sentiment. Although a decline in GDP and an ever increasing jobless tally was anticipated by the markets, they did not forecast President Trump verbal assault in the Chinese. These latest claims suggest the Virus is man-made despite the advice from his own specialists. This was enough to cause a sell-off in the second half of the week. By the close on Friday, the SPDR S&P 500 ETF (SPY) just managed to slip back into negative territory and finish lower by 0.04%.
The VIX unsurprisingly remained firm during the week due to the fluctuations in the market although has receded somewhat from its recent highs. By Friday, the index had increased by 3.51%.
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 - May 3, 2020
Red Robin Gourmet Burgers (RRGB)
Another strong week from RRGB saw the stock continue its recovery. However, at one point in the middle of the week, much like the broader market, the stock was trading significantly higher. In fact, it was more than $4 higher before a culmination of sour economic data and speculative Presidential meanderings sent stocks lower.
Now new deal news this or filings so it appears RRGB remains a COVID-19 play for the time being. Although the sharp rise on Tuesday (albeit roughly inline with the market) may suggest there might be something more going on. Mirroring the broader market performance during the week, the stock closed at the end of Friday up $2.04 at $13.78, a rise of 17.38%. This now leaves the simple spread at a mere 190.28%. This is against the original bid from activist Vintage Capital for $40 per share.
Wright Medical (WMGI)
Wright Medical was also amongst the biggest winners this week. The company announced during the week the extension of the closing date to the tender offer from Stryker. In times when many deals are being called into question for their economic rationale is seems strange that an acquiring firm will need to extend the tender offer closing deadline. Previously the offer was scheduled to close on Thursday April 30. The stock closed that day at $29.12. traders could have bought and tendered for a quick profit of $0.63. If, however, the tender was successful. Which, given the spread, was looking rather unlikely. It is no surprise then WMGI announced the stock tendered at the previous close date amounted to just 4.6%.
The closing date has now been extended to June 30, 2020. Following last week’s EGM, the shareholders voted on a number of resolution pertinent to the deal, all of which passed successfully. In light of this, the minimum tender condition has been automatically reduced to 80%. It appears very few people are discussing this situation. There has been a large amount of put purchase made recently suggesting either traders are expecting the deal to fall apart, or they are being used as a hedge. Either way, stockholders have not been in a rush to tender their shares.
The stock was trading at around $20 before the original tender offer was made. However, there has not been any sufficient news to suggest the lack of tendering by shareholders is because they are calculating a floor price in excess of the current offer price. We shall continue to investigate this situation and report accordingly. In the meantime, the stock was up $0.55 at $29.53, a rise of 1.90%. As things stand, we are yet to initiate a position in this stock.
Front Yard Residential (RESI)
RESI makes a rare appearance in our coverage this week. The stock which is currently the subject of a $12.50 a share takeover from Amherst Residential. Company stockholders have already approved the acquisition but saw the stock continuously decline throughout the week. It appears the outstanding Freddie Mac Loan consent may be troubling investors as to whether this deal can proceed. The stock price before the deal announcement was just over $11. Even with the market decline, this still limits the downside in this spread.
By the end of the week the stock finished down by $1.49 at $10.83, a fall of 12.09% leaving the simple spread at 15.42%. We don’t currently have a position in this stock but despite the outstanding closing conditions we may initiate a position in the near future.
Fitbit (FIT)
Fitbit also suffered this week as the stock succumbed to a spate of profit taking in line with the broader market. The stock has performed well over recent weeks and in light of there being no new deal news traders have elected to take some money of the table. By the end of the week the stock finished down by $0.12 at $6.77, a fall of 1.74% leaving the simple spread at 8.57%. Despite this recent setback, 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.
