This is the weekly Merger Arbitrage Performance Review – June 7, 2020. This report focusses on BITA, TIF, FSCT & RRGB arbitrage spreads during the period 1st June – 5th June. 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 31st 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 – June 7, 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 & TIF.
Table of Returns
Merger Arbitrage Performance Review - June 7, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 1.87% | SPY | 4.94% |
| Index Dispersion | 7.02% | VIX | (10.87)% |
| Winners | 11 | MNA | 1.96% |
| Losers | 8 | ||
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads continued their recovery this week spearheaded by a positive announcement from Red Robin Gourmet Burgers (RRGB). This built on the positive returns observed last week in the index. Even a scare to the deal closing probability (DCP) of the Tiffany takeover wasn’t enough to stop the index powering ahead.
The T20 index closed up for the week by 1.78% with RRGB providing the majority of this gain. The winners beat the losers by a margin of 11 to 8 with 0 non-movers and 1 cash position, identical to last week. The standard deviation of the individual index returns moved sharply higher as a result of the outsized return posted by RRGB. This week’s figure was recorded as 7.02%. This sudden increase is sufficient to put the number above 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. A solid start to the week was rounded off on Friday morning following the announcement of fresh economic data. Financial takeover stocks such as E*Trade (ETFC) and TD Ameritrade (AMTD) provided much of the observed gains. By the close on Friday, the IQ Merger Arbitrage ETF was up 1.96%.
The broader market continues to experience improving investor optimism but it was the surprise Jobs number that really set the market alight. The U.S. economy unexpectedly added 2.5 million jobs in May, as the unemployment rate declined to 13.30%. With the market already experiencing string gains for the week, a further 2.5% was added on Friday. The broader market has now erased the losses for the year and stands (dividends reinvested) in positive territory. By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was in the black finishing higher by 4.94%.
The VIX unsurprisingly fell during the same period as sentiment improved. By Friday, the index had fallen by 10.87%.
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 - June 7, 2020
Tiffany & Co. (TIF)
The biggest story of the week in the merger arbitrage space was the announcement in Women’s Wear Daily of the convening of the LVMH board to discuss the buyout of Tiffany & Co. Upon the breaking of this story the stock plummeted as journalists everywhere scrambled for news as to how secure the deal was. The discussion subsequently swung back and forth, as it was reported how Tiffany had not been contacted about any issues with the deal, to a further report suggesting Bernaud Arnault was under pressure to renegotiate the purchase price in the takeover, currently at $135.
LVMH then issued their own statement informing the market they would not be buying Tiffany stock in the open market. Thursday and Friday saw subsequent reports from CNBC and Reuters respectively stating how Tiffany would be prepared to seek legal action if necessary to complete the deal and then how LVMH were rumored the next day to be backing off from taking action following Tiffany’s statement.
So what were/are the options for LVMH? Could they realistically claim a material adverse effect from the COVID-19 pandemic and exit the deal? Could it be possible to renegotiate the price? Well, simply put it’s unlikely. Without going into the legalities too deeply, to exit the deal the bar is set pretty high. A renegotiation of the price might be worth asking for, but LVMH is a $230bn company. Tiffany is being valued at just $16bn. LVMH stock has now recovered to the levels seen in mid-February. LVMH clearly has the purchasing power and the funds available to complete the deal. As a proxy for TIF, investor in LVMH view the business as being particularly resilient during these times and is not classed as struggling. In which case, Tiffany have no reason to agree to a cut.
There is the small matter of additional regulatory approvals but LVMH will still be bound by the merger agreement to do what is required of them in terms of assisting the regulator to achieve clearance. At this time, there is no reason to consider the regulatory issue as being any different to what it was at the start of the week.
Based upon this analysis we took a small positon at the start of week expecting to see the situation slowly resolve itself and TIF return to the high $120’s. However, the rise on Friday has put us slightly ahead of schedule in this analysis. We are left wondering why we took only a “small” position.
This is a classic example of how investment opportunities present themselves when rational thought and analysis is applied. With M&A news thin on the ground, perhaps the importance of various corporate actions are being exaggerated or taken out of context in order to produce copy. All things remaining constant, it is only natural the LVMH should meet to discuss the takeover and review their corporate strategy. Perhaps investors should be asking why this was not done earlier as the broader market plummeted and lost a third of its value. Incidentally, Tiffany hit a low of $111 during this time with no mention of any LVMH action. During the past week, the stock dipped below $114. At the close on Friday, the stock had fallen $6.14, or 4.79% to $121.99, the deal is now offering a simple spread return of 10.66%.
Forescout Technologies (FSCT)
Forescout Technologies moved sharply lower on Friday as Advent claimed that Forescout involved Merlin in a “channel stuffing scheme” in Q4 2019. We commented previously how there was something awry with this deal. Advent had stated there was an irregularity whilst Forescout tried to pass it off as a COVID-19 issue and therefore had no basis.
Last week we stated
The vagueness of their commentary however does raise our suspicions.
We now have the details we were looking for. It is a very real possibility this deal could fall apart and we are happy not to have a position. By the close on Friday, the stock had finished down by $0.49 at $23.10, a fall of 2.08%.
Red Robin Gourmet Burgers (RRGB)
RRGB continues its recovery inline with the broader market. As the economy reopens sectors such as hospitality have much to gain and it appears RRGB is taking advantage. The $40 per share offer from Vintage Capital is currently on the back burner as the two parties work together to ensure the continued resurgence of the restaurant chain. The stock closed at the end of Friday up $4.03 at $17.89, a rise of 29.08%. This leaves the simple spread at a mere 123.59%.
Bitauto Holdings (BITA)
Bitauto also had an impressive week although not quite in the same league a RRGB. The stock continues to move ahead with the improving global economic position. Although we have commented previously how Chinese related stocks continue to do well, the bubbling political tensions do trouble us slightly. BITA closed up at $13.89. A rise of $1.01 or 7.84%. This leaves the merger arbitrage simple spread at 15.19%. We remain holders of our small position in this stock but may be tempted to cut the holding. This may result in a small loss, but we suspect this spread may move lower in relation to the geo-political climate before the potential closing of the deal.
