This is the weekly Merger Arbitrage Performance Review – July 5, 2020. This report focusses on TIF, BREW, EE & ACIA arbitrage spreads during the period 29th June – 2nd July. 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 28th June 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 compares and reviews the performance of the broader market with the MNA. Then we more specifically discuss the performance of the overall T20 Index. 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 – July 5, 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 CLGX, TKAYF & GRUB, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - July 5, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.37% | SPY | 4.05% |
| Index Dispersion | 1.14% | VIX | (20.30)% |
| Winners | 10 | MNA | 0.35% |
| Losers | 5 | ||
Market Performance Review
The broader market moved consistently higher throughout the holiday shortened trading week (follow this link for an up-to-date international stock market holiday calendar). This 4 day period also saw the end of the second quarter of 2020 in which the Dow Jones Industrial Average posted its best quarterly performance since the crash of 1987. Although jobs data appears to be improving, the numbers themselves come with a health warning and are subject to wild revisions as collection methods adapt to the new environment. This was demonstrated as traders disected the figures on Thursday and reversed the strong gains made at the open. The acceleration in the number of cases in the U.S. continues to confuse market observers as to how economic performance will be effected going forward. By the close on Thursday, the SPDR S&P 500 ETF (SPY) index fund was firmly in positive territory finishing higher by 4.05%.
The VIX unsurprisingly declined sharply during the same period. By Thursday, the index had fallen by 20.30%.
The IQ Merger Arbitrage ETF (MNA) also managed to finish in positive territory for the week. This performance came via the positive performance of TD Ameritrade (AMTD). The lack of adequate short positions in the portfolio appear to have benefitted from the broader market rise. By the close on Thursday, the IQ Merger Arbitrage ETF was up 0.35%.
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 Portfolio Performance Review
Cash merger arbitrage spreads produced a positive return this week and continued the recent positive trend. This came as a number of deals that were already expected to close consummated sucessfully. Whilst this postive news was welcomed by the markets is does make existing investible candidates more difficult to find as new deals remain few and far between. Positive performances from spreads that have been under pressure of late, such as TIF also contributed to the performance of the Index. A deals approach announced last week by Cannae Holdings (CNNE) for CoreLogic (CLGX) has not yet entered the index as the spread currently trades at a premium as traders anticipate a higher offer. Readers are advised to check our dedicated deal page to stay abreast of developments in this deal.
The T20 index closed up for the week by 0.37% with TIF providing the majority of this gain. The index was comprised of an incomplete complement of 16 merger arbitrage cash deals and 4 cash positions. The winners beat the losers by a margin of 10 to 5 with 1 non-mover. The standard deviation of the individual index returns recorded its lowest reading since the outbreak of Covid-19. This week’s figure was recorded as 1.14%. This puts the figure significantly below both the short term average and the medium term average figure.
Merger Arbitrage Performance Review - July 5, 2020
Tiffany & Co. (TIF)
Tiffany & Co. was the best performer during the shortened trading week. The stock has moved ahead in recent weeks following speculation in the media that the deal may be in trouble. We reiterate our previous analysis by querying why it took so long for the LVMH board to convene a meeting during the height of the pandemic to discuss the pending takeover. By the time the meeting took place, LVMH’s own stock had returned to (almost) pre Covid-19 levels thus suggesting investors are bullish about the company’s prospects in the long run. With the wider market also rallying hard to regain lost ground, it would seem difficult for LVMH to argue a Material Adverse Effect has occurred even if they wished to do so.
One potential issue could be the intervention of the European Commission. As things stand, a decision on the deal is not likely to come until August/September. As options trading has proved a fertile ground for those wishing to maximize profit opportunities in merger arbitrage, we strongly suggest traders stay vigilant and watch the actions of the European Commission closely. At the close on Thursday, the stock had risen $2.65, or 2.22% to $122.22. The deal is now offering a simple spread return of 10.46%. We will continue to maintain our position for the foreseeable future.
Craft Brew Alliance (BREW)
BREW also moved forward this week as the market digested news about the growing “off-premises” sales of alcoholic beverages. However, the majority of the week’s move came on Thursday when the stock moved up by 1.5%. No immediate explanation has been offered for this move. We suspect therefore this may be a combination of the increase in the broader market and the possibility that some progress has been made in sale of the Kona Hawaii business as required by the DoJ. The stock moved up $0.30 or 1.96% to $15.63. The leaves the simple spread at 5.57%.
The expected completion date is unchanged from the previous guidance of “the transaction is expected to close in 2020”. It is it possible the disposal could go through sooner rather than later with the deal closing in the next few months and producing an attractive annualized return. In keeping with our previous analysis we have initiated a position in this stock.
El Paso Electric (EE)
El Paso Electric also made its way into the best performers this week. A rare appearance for this spread that has acted stealthily in its progression towards deal consummation. Having recently announced the payment of its quarterly dividend , the company also reiterated
EE and Infrastructure Investments Fund have extended the end date for the transaction to September 1, 2020. Federal Energy Regulatory Commission approval of the parties’ mitigation plan is the last remaining approval, and EE and IIF expect to close promptly following its receipt.
In light of this, the company also announced plans to pay a stub period dividend. This is where the regular dividend is paid pro rata to the time from the previous ex-div date until the date the parties consummate the deal. The stock moved up $0.25 or 1.89% to $67.37. The leaves the simple spread at 1.31%.
Acacia Communications (ACIA)
Acacia Communications was this week’s biggest loser. We previously scaled back our ACIA position as we felt the spread had moved too far for that point in the deal timeline. However, this week’s decline may be caused by nervous investors reducing positions ahead of the walk date on the deal which hits on July 7. By Thursday, ACIA fell 1.83% to $67.05 giving a simple spread of 4.40%.
