This is the weekly Merger Arbitrage Performance Review – May 10, 2020. This report focusses on RRGB, BREW, RESI & BITA arbitrage spreads during the period 4th May – 8th 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 3rd May compiled by Merger Arbitrage Limited. Investors and traders can follow our latest
Following the performance table of investment returns, the first section of this report discusses the performance of the overall index. Then we compare and review this performance with the IQ Merger Arbitrage Exchange Traded Fund (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 10, 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.
Table of Returns
Merger Arbitrage Performance Review - May 10, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | (0.66)% | SPY | 3.44% |
| Index Dispersion | 6.05% | VIX | (24.76)% |
| Winners | 11 | MNA | 1.59% |
| Losers | 8 | ||
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads had looked set to continued their recovery until Frontyard Residential (RESI) chose to spoil the party. A deal which previously had some market watchers rubbing their hands at the prospect of a juicy spread was abandoned on Monday. The announcement came as the firm revealed “its best-ever operational quarter“. Speculation continues as to how many existing deals will survive as acquirers reassess the profitability of acquiring companies at previously higher valuations. There was however some positive news as new deals were announced for the first time which are eligible for inclusion in our merger arbitrage index.
The T20 index closed down for the week by 0.66%. The loss was of course attributable to the decline in RESI. However, notable advances were made in BREW, RRGB & AXE. This time out, the winners still managed to squeeze past the losers by a margin of to 11 to 8 with 1 non-movers. The standard deviation of the individual index continued to subside during the past week and settled at 6.05%. One extreme movement this week, (you know who that was) was sufficient to cause the mini spike in this figure. In light of that, this week’s reading now pops up above both the short and medium term average figure. 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), sported a solid rise throughout the week. A consistent positive performance was underpinned by the continued returns in Delphi Technologies (DLPH) and Willis, Towers, Watson (WLTW). Returns were boosted due to the lack of hedging normally associated with stock deals thus benefitting from broader market movements. By Friday, the IQ Merger Arbitrage ETF was up 1.59%.
The broader market had a slightly more volatile ride but painted a broadly similar picture. Despite the total jobless claims for April coming in above 20m, wiping out a decade of growth since the last recession, the broader market instead focused on the positives. Namely, up to 80% of these layoffs are expected to be short term. Gains in oil were also registered as firms across the globe implemented the necessary production cuts to remain in business. The S&P 500 is now more than half way back towards its high before the COVID-19 outbreak. By the close on Friday, the SPDR S&P 500 ETF (SPY) was comfortably in positive territory and finished higher by 3.44%.
The VIX unsurprisingly fell significantly during the week due to the improved sentiment in the market. By Friday, the index had decreased by 24.76%.
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 10, 2020
Craft Brew Alliance (BREW)
In a week where a number of pending acquisition targets announced earnings, Craft Brew Alliance stepped up as one of the stand out performers. Both EPS and Revenue beat market forecasts (which had been lowered) but provided investors with the necessary degree of comfort. These figures are for the quarter ending March 31, so the impact of the COVID-19 outbreak on a full earnings period is yet to be felt. However, the company listed a number of measures it has taken to mitigate the effect as best as possible. The timeline of reopening the brewpubs will be a closely watched developments across the industry and the country as localized easing of restrictions are implemented.
Contained within the earnings press release issued on Wednesday was also a small reference to the pending acquisition by Anheuser-Busch (“A-B”). The company stated,
During the quarter, we also continued working closely with regulators in support of our pending combination with Anheuser-Busch (“A-B”), which received overwhelming support by a majority of non A-B shareholders at our shareholder meeting in February and is expected to close this year.
Investors clearly raised a glass to this news as by Friday’s close, the stock was up $0.59 at $15.63, a rise of 3.92%. However, the company failed to expand on the state of the request from the DOJ for additional information in relation to the merger. Simply adding,
As previously disclosed, following the approval by shareholders, the proposed expanded partnership remains subject to the satisfaction of customary closing conditions, including receipt of requisite regulatory approvals.
The expected completion date is also unchanged from the previous guidance of “the transaction is expected to close in 2020“. The current simple spread now stands at 5.57%. Although the stock was trading higher at the end of April we currently think with the ongoing regulatory involvement and the extended completion timeline that this valuation is a bit rich. We currently have no position in Brew and are unlikely to initiate one in the near future.
Red Robin Gourmet Burgers (RRGB)
Another strong week from RRGB saw the stock continue its recovery, although it remains short of its recent highs. No new deal news to report this week but in line with the broader market the stock has managed to climb higher. It remains to be seen to what extent the “re-opening” of the economy will have on the restaurant industry as social distancing policies will still be expected by many. However, investors continue to look to the positive side. The stock closed at the end of Friday up $0.51 at $14.29, a rise of 3.70%. This now leaves the simple spread at a mere 179.92%. This is against the original bid from activist Vintage Capital for $40 per share.
Front Yard Residential (RESI)
RESI makes another rare appearance in our coverage this week, unfortunately for the wrong reasons. The stock was the subject of a $12.50 a share takeover from Amherst Residential. However, on Monday the deal was abandoned with Amherst choosing to pay the $25m break-up fee. Along with stock purchase commitments and a loan, Amherst has decided it is still better to walk away. This is a stark reminder that although we are in a unique period of economic activity, deals with break-up fees which are designed to encourage firms to consummate the transaction may still break when an acquirer chooses to pay a fee equating to 6.7% of the current target value.
By the end of the day, the stock had finished down by $2.83 at $8.00, a fall of 26.13%. In line with the construction guidelines for the T20 Index, this was the final price used in calculating the index value.
Bitauto Holdings (BITA)
Bitauto continues to cement its place in the largest movers category with yet another entry for the third time in four weeks, this time in the losers section. There was however signs of life in the Chinese auto industry reported recently. As China begins to open up parts of its country and economy following the COVID-19 outbreak, it is natural to assume that stocks with Chinese connections will tend to move forward. However, without any new deals news reported during the week, the stock closed down at $11.47. A fall of $0.16 or 1.38%. This leaves the merger arbitrage simple spread at 39.491%. We remain holders of our small position in this stock and expect to continue to do so for the foreseeable future.
