This is the weekly Merger Arbitrage Performance Review – May 24, 2020. This report focusses on RRGB, FSCT, BITA & TECD arbitrage spreads during the period 18th May – 22nd 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 17th 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 24, 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 24, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | (0.69)% | SPY | 3.20% |
| Index Dispersion | 5.71% | VIX | (11.70)% |
| Winners | 6 | MNA | (0.86)% |
| Losers | 14 | ||
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads suffered again this week extending the losing run to three weeks in a row. The main focus was on Forescout Technologies (FSCT). The firm has now entered legal proceedings to force Advent to close the deal. In the mean time the decline in the stock was enough to drag the T20 Index lower. The decline was however tempered by the gains made by Red Robin Gourmet Burgers (RRGB) and Bitauto Holdings (BITA).
The T20 index closed down for the week by 0.69%. Almost singlehandedly due to the decline in FSCT. Once again the losers that triumphed handsomely by a margin of 14 to 6 with 0 non-movers. The standard deviation of the individual index returns however climbed as a result of the extreme loss in FSCT. This week’s figure was recorded as 5.71%. Although what might be considered a high figure, it is below both the short term average but above the 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) also finished down for the week. A small rally on Friday was not enough to reverse a steady decline throughout the week. As with the T20 Index, FSCT provided the bulk of this negative performance whilst supported by a smaller drop in TECD. Delphi Technologies (DLPH) however continues to move forward providing some positive return benefitting from the rise in BorgWarner (BWA). By the close on Friday, the IQ Merger Arbitrage ETF was down 0.86%.
The broader market however benefited from continued investor optimism and continued to power ahead. Monday saw strong gains which the market was able to hold on to during a quiet trading week ahead of the Memorial Day holiday shortened trading week. However, political tensions remain with the senate having recently introduced a bill which could lead to the delisting of Chinese stocks from U.S. exchanges. By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was in the black finishing higher by 3.20%.
The VIX unsurprisingly fell during the same period as sentiment improved. By Friday, the index had fallen by 5.71%.
We 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?
- Are individual merger arbitrage stocks still supported by higher floor prices now that the market kas moved lower?
Merger Arbitrage Performance Review - May 24, 2020
Red Robin Gourmet Burgers (RRGB)
In a quiet week for the majority of stocks, RRGB still managed to fluctuate in its usual manner. No specific news to report here other than the stock moving forward with the wider increase in market optimism. What is of note however is the slew of filings detailing the recent stocks awards for the board of directors with most receiving 7,768 shares. The explanation given is that the award
Represents a grant of restricted stock units under the issuer’s 2017 Performance Incentive Plan, as amended. Each restricted stock unit represents the contingent right to receive, upon vesting of the unit, one share of the issuer’s common stock. The units are scheduled to vest on the earlier of the first anniversary of the date of grant or the next annual meeting of stockholders. The closing price on the date of grant was $14.16
Nice work if you can get it. The $40 per share offer from Vintage Capital is currently on the back burner as the two parties work together to ensure the survival of the restaurant chain during this difficult period. The stock closed at the end of Friday up $1.25 at $14.12, a rise of 9.71%. This leaves the simple spread at a mere 183.29%.
Bitauto Holdings (BITA)
A steady rise through the week was enough to see BITA outperform despite a fall on Friday. In a week where Chinese related stock may have been expected to suffer BITA appears to have held up extremely well. Trading volumes were also fairly brisk during a relatively quiet pre holiday trading week. Without any new deal news reported during the week, BITA still managed to close up at $11.59. A rise of $0.93 or 8.72%. This leaves the merger arbitrage simple spread at 38.05%. We remain holders of our small position in this stock and expect to continue to do so for the foreseeable future.
Forescout Technologies (FSCT)
Forescout Technologies moved sharply lower on Monday as the company announced that
Advent provided notice to Forescout that it would not be proceeding to consummate the acquisition of Forescout on May 18, 2020, as scheduled
The stock continued to trade lower over the next couple of days when an update from Forescout was released stating they had filed a complaint with the Delaware Court of Chancery. The press release also stated,
On May 15, 2020, Advent notified Forescout that it would not consummate the acquisition on May 18, 2020, as scheduled. Advent’s purported excuse for its wrongful conduct is that a closing condition to the transaction has not been satisfied because a “material adverse effect” has occurred at Forescout. Forescout believes that no material adverse effect has occurred, that all closing conditions are satisfied, and that Advent is obligated to close the transaction. Forescout believes that Advent has relied on meritless excuses to support its position.
And then continued,
The merger agreement explicitly allocated the risk of any impacts from COVID-19 to Advent. Since announcing the transaction, Forescout shareholders overwhelmingly approved the transaction…“We have satisfied all conditions to closing under our merger agreement, and a material adverse effect has not occurred,”
However, Forescout have not explicitly stated that the reason for the company material adverse effect claim was related to the Covid-19 pandemic. Finally, on Friday, the stock rebounded on news that a Delaware judge has set an evidentiary hearing for the company’s lawsuit against Advent for June 2-3. Unfortunately for Advent, the hearing comes before the June 6 termination date thus denying them the possibility of escape by allowing the deal to lapse. By the close on Friday, the stock had finished down by $6.12 at $23.40, a fall of 20.73%.
This decline follows the revelation of potential issues surrounding the restructuring and borrowings of FSCT and whether or not they breach a loan covenant. Some analysts believe the stock may fall as low as $13 in the worst case scenario. Advent have yet to comment on the case but clearly believe they have a potential exit via a MAC clause. FSCT however feel confident they can force Advent to close. Then again, FSCT clearly want the acquisition to happen so in effect they have nothing to lose. The vagueness of their commentary however does raise our suspicions. We previously stated we are considering a short position in this stock but were unable to do so before Monday’s announcement.
Tech Data Corporation (TECD)
Tech Data Corporation makes yet another “rare” appearance in the largest moves this week. The firm is subject to a takeover from Apollo Global for $145 per share announced on November 13, 2019. An Amended Annual Report (10-K/A) was filed with the SEC on Thursday May 21, 2020 furnishing supplemental information primarily related to the Board of Directors. The document also contained a brief reference to the pending merger
Pursuant to the Merger Agreement, the affiliates of the Apollo Funds will acquire all the outstanding shares of the Company’s common stock (other than shares held by us as treasury stock or held by certain affiliates of the Apollo Funds) for $145 per share in cash (the “Merger”). On February 12, 2020, we held a special meeting of shareholders. At such meeting, the Merger Agreement was approved and adopted by a majority of the outstanding shares of the Company’s common stock entitled to vote thereon. The waiting period with respect to the premerger notification and report form filed by the parties under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, has expired. The completion of the Merger remains subject to other customary closing conditions and to certain foreign regulatory approvals. All applications for foreign regulatory approvals have been filed, and some have been granted while others are still pending.
Following this, the stock opened flat on Friday but moved sharply higher later in the day. However, declines during the week meant that by the close, the stock was down $5.04 at $132.24, a fall of 3.67%. The simple spread now at 9.65%. We are yet to initiate a position but may do so in the near future.
