This is the weekly Merger Arbitrage Performance Review – May 31, 2020. This report focusses on BITA, TECD, TIF & ADSW arbitrage spreads during the period 26th May – 29th 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 24th 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 31, 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.
Additional live news updates for these deals can be found on our customized T20 Index news feed. Even more specific merger details & news can be found on the dedicated news and merger factsheet pages including popular deals such as TTPH, TECD, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - May 31, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.84% | SPY | 3.01% |
| Index Dispersion | 2.82% | VIX | (2.31)% |
| Winners | 11 | MNA | 0.65% |
| Losers | 8 | ||
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads rebounded this week snapping a three week losing streak. Bitauto holdings (BITA) became the focus of investor enthusiasm buoyed by ever increasing investor sentiment both in china and domestically. Despite an unusual decline in ADSW the index remained in positive territory.
The T20 index closed up for the week by 0.80%. Almost singlehandedly due to the improvement in BITA. During this holiday shortened trading week, the winners beat the losers by a margin of 11 to 8 with 0 non-movers and 1 cash position. The standard deviation of the individual index returns recorded its lowest level since the COVID-19 outbreak despite the outsized return from BITA. This week’s figure was recorded as 2.82%. Although a high figure in a longer historical context, it is significantly below both the short term average and medium term average figure. The index was comprised of an incomplete complement of 19 merger arbitrage cash deals and 1 cash position.
Market Performance Review
The IQ Merger Arbitrage ETF (MNA) also finished in the black for the week. Gains in the first half of the week were maintained despite a small decline on Friday. This increase was attributed to gains made in ETFC, AMTD & Delphi Technologies (DLPH). By the close on Friday, the IQ Merger Arbitrage ETF was up 0.60%.
The broader market however benefited handsomely from continued investor optimism and moved ahead yet again. Some market observers are already beginning to question if the market is becoming over bought as investors move cash out of the bond markets and into stocks. Domestic economic news was scarce during Memorial Day holiday trading week, however the EU stimulus package went some way to fueling increased investor optimism. By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was in the black finishing higher by 3.01%.
The VIX unsurprisingly fell during the same period as sentiment improved. By Friday, the index had fallen by 2.31%.
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 31, 2020
Bitauto Holdings (BITA)
A rocket propelled start to the week on Tuesday saw BITA become the week’s best performer. Gains were maintained during the week with the stock hitting a high of $13.05. Chinese related stocks continue to do well although we would have expected some specific news for a rise of this magnitude. The stocks has built upon a near 9% rise last week without any new deal news being reported. BITA closed up at $12.88. A rise of $1.29 or 11.13%. This leaves the merger arbitrage simple spread at 24.22%. We remain holders of our small position in this stock and expect to continue to do so for the foreseeable future.
Tech Data Corporation (TECD)
Tech Data Corporation makes what is fast becoming a regular appearance in this column. The firm is subject to a takeover from Apollo Global for $145 per share announced on November 13, 2019. Thursday saw the announcement earnings results for the first quarter ended April 30, 2020. This solid set of results led to an increase in this price of approximately $3 following a similar rise on Wednesday preceding the anticipated results. However, there was no mention of the pending takeover in the official SEC filings.
Despite declining on Friday the stock finished the week up $4.00 at $136.24, a rise of 3.02%. The simple spread now at 6.43%. We had previously stated we may look to initiate a position in the near future but decided to hold off until after earnings during this period of uncertainty. These latest results will help support a rising floor price in the stock thus limiting the down side should the deal fall apart. Investors have already voted to accept the deal so there are no issues there. However, regulatory clearance is still required in Australia which under the current circumstances is delayed. There is nothing apparent to suggest this will be an issue, however, the delay will cause the spread to widen whilst simultaneous increasing the chance something else could go wrong. In light of this and the advancement made in the stock, we shall now wait for a pull back before entering a position.
Tiffany & Co. (TIF)
Tiffany & Co. (TIF) also makes it into the biggest movers this week. Wednesday saw a dramatic (for Tiffany) rise in the stock although on volume significantly lower than the 3 month average. The firm had recently declared a dividend of $0.58 and will go ex-div on June 19. Following the $3.06, or 2.45% rise in the stock to $128.13, the deal is now offering a simple spread return of 5.36%. Although the deal was previously slated to consummate at the end of June, even a delay until the end of the next quarter could still provide a great annualized return.
Advanced Disposal Services (ADSW)
Advanced Disposal Services (ADSW) is a deal which has now been live for over a year but receives limited coverage. The firm is the subject of an all cash friendly takeover bid of $33.15 from Waste Management (WM). The deal had an original expected closing date of the second quarter of 2020. In a filing dated March 19, 2020, the company stated,
This Form 8-K is being filed to update our prior timing expectations. As a result of, and subject to any further effects from, the COVID-19 (coronavirus) outbreak, and subject to obtaining final regulatory approval from the DOJ (which is currently anticipated in the second quarter of 2020), the Company now anticipates closing the Merger mid to late second quarter 2020.
On May 22, 2020, however a report on CTFN stated,
Waste Management does not have a definitive agreement with the unidentified buyer of the assets and is still negotiating with over price and other issues, according to the report.
This caused the stock to decline during the week by $0.76 to $31.18. This gives a simple spread 6.32%. We had previously cautioned investors as to the timeframe for this deal, analysis which now proves justified. We currently believe that although we think this deal will consummate successfully, the spread is not commensurate with the risk involved.
