This is the weekly Merger Arbitrage Performance Review – May 17, 2020. This report focusses on RRGB, FSCT, BITA & WBC arbitrage spreads during the period 11th May – 15th 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 10th May 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 index. Then we compare and review this performance with the 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 17, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | (1.84)% | SPY | (2.13)% |
| Index Dispersion | 3.13% | VIX | 13.97% |
| Winners | 5 | MNA | (2.28)% |
| Losers | 12 | ||
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads took another beating this week as Red Robin Gourmet Burgers (RRGB) suffered. Increased economic worries and tensions with China has rocked the faith that traders were accumulating in some of these deals. As was previously a recurring theme during the height on the recent trade war, deals with Chinese connections have been hit and we fear this may be a prolonged issue. It is unclear what is the end game for President Trump in taking this stance with China. There was however some positive news as new stock deals were announced during the week including a new entrant in the bidding war for TetraPhase Pharmaceuticals (TTPH).
The T20 index closed down for the week by 1.84%. The loss was of course attributable to the decline in RRGB. There were additional significant declines however made by FSCT & BITA. This time out, it was the losers that triumphed handsomely by a margin of 12 to 5 with 3 non-movers. The standard deviation of the individual index continued to come down during the week and settled at 3.13%. Although what might be considered a high figure, it is below 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), finished down for the week following a drop on Tuesday from which it was unable to recover. A fall in Taubman Centers, Inc. (TCO) was the main cause of this although a drop in TD Ameritrade Holding (AMTD) amongst others also contributed. Once again the instruments used in the hedging of merger arbitrage spreads failed to protect investors from downside movements. By Friday, the IQ Merger Arbitrage ETF was down 2.28%.
The broader market however which also declined on Tuesday continued in that direct through Wednesday. Thursday and Friday saw a recovery but not enough to take the market back into the black. Poor economic data, as expected weighed heavily on the markets. As did the presidents stance towards China. Traders fear the U.S. administration’s move to block semiconductor shipments to Huawei may lead to a worsening global trading environment at the worst possible moment. The S&P 500 has settled at around a 50% recovery to the levels reached before the COVID-19 outbreak. By the close on Friday, the SPDR S&P 500 ETF (SPY) was in negative territory and finished lower by 2.13%.
The VIX unsurprisingly rose significantly during the week as sentiment deteriorated. By Friday, the index had risen by 13.97%.
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 17, 2020
WABCO Holdings (WBC)
WABCO announced some positive news on Friday which helped its stock become the best performer in the T20 Index. This saw the firm announce,
All required regulatory approvals have now been received and WABCO and ZF expect to close the merger on May 29, 2020, subject to the satisfaction of all other closing conditions.
Approval from the Chinese State Administration for Market Regulation (SAMR) was the last regulatory approval required. This comes not a moment too soon as President Trump raises tensions with China. It is yet to be seen if this will spill over into the finance sector. It is however not beyond either side to use their regulatory power to further their own political means. The deal now has a modified expected closing date of May 29, 2020.
Red Robin Gourmet Burgers (RRGB)
A difficult week for RRGB saw the stock decline sharply. No new developments deal wise this week but in line with the sector and the broader market, the stock moved lower. Macro economic factors such as reduced level of consumer spending power following the easing of lock down restrictions will continue to weigh on this stock until the situation becomes clearer. The stock closed at the end of Friday down $1.42 at $12.87, a fall of 9.94%. This now leaves the simple spread at a mere 210.80%. This is against the original bid from activist Vintage Capital for $40 per share.
Forescout Technologies (FSCT)
Forescout Technologies moved sharply lower during the week following worse than expected earnings results on Monday. Q1 GAAP EPS of ($1.26) missed by $0.70 and revenue of $57.15M missed by $21.73M. By the end of the week, the stock had finished down by $2.70 at $29.52, a fall of 8.38%.
This decline follows the announcement from the previous week by an Owl Rock (ORCC) executive who claimed Owl Rock will stand by its borrower commitments despite the current macro uncertainties. Owl Rock is backing Advent’s $1.9B purchase of Forescout. Issues surround the restructuring and borrowings of FSCT and weather or not they breach a loan covenant. Some analysts believe the stock may fall as low as $13 in the worst case scenario. We are considering a short position in this stock as we suspect there could be an announcement soon as to how this deal will progress.
Bitauto Holdings (BITA)
Either directly or indirectly, COVID-19 continues to play an ever increasing role in investment decisions. In the case of Bitauto, the concerns over the pandemic have been raised by the U.S. government and aimed at China. Investors are bracing themselves as to how this will effect the mergers & acquisitions market. Naturally, deals with Chinese connections continue to exhibit volatility an as always, investors are urged to examine this merger arbitrage exposure to this sub-segment of the market. Without any new deal news reported during the week, BITA closed down at $10.66. A fall of $0.81 or 7.06%. 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.
