This is the weekly Merger Arbitrage Performance Review – July 26, 2020. This report focusses on EE, QGEN, SINA & BREW arbitrage spreads during the period 20th July – 24th 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 19th July 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 26, 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 CVX–NBL, ADI–MXIM, NGHC, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - July 26, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.60% | SPY | 0.25% |
| Index Dispersion | 2.42% | VIX | 0.62% |
| Winners | 9 | MNA | 0.22% |
| Losers | 8 | ||
Market Performance Review
A small decline week on week in the broader market disguises the almost euphoric and subsequent dose of reality to which traders were exposed to during the week. The market managed to shrug off early indications of geo political tensions in the first half of the week. Fueled by a landmark economic stimulus package in Europe the market moved higher and at nearly +2% for the week, was back into positive territory for the calendar year. However, reality finally set in when job claims on Thursday remained stubbornly high and tensions with China took a more serious turn. Meanwhile domestic cases of the virus continue to rise unabated, numbers that are sadly beginning to filter their way down to the bottom line.
Congress continues to debate the extent of the next level of economic stimulus for ordinary Americans. But with no end in sight o the pandemic, market observers are beginning to question how much longer and at what level this can be sustained. By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was lower by 0.25%. During the week, the VIX behaved accordingly. By Friday, the index had risen slightly by just 0.62%.
The IQ Merger Arbitrage ETF (MNA) also finished in negative territory for the week although treading a rather more stoic path during the period. Netent AB and E*Trade (ETFC) were the biggest decliners in the index. By the close on Friday, the IQ Merger Arbitrage ETF was lower by 0.22%.
Following the resurgence of Covid-19 cases we repeat the following section from our previous analysis for the benefit of our readers
As the pandemic continues, it is important for traders and merger arbitrageurs to consider, on an individual basis, how each of their positions will be affected by the continued spread of the coronavirus.
- How can the pandemic affect the granting of regulatory approval in foreign territories such as China?
- What is the likelihood of a delay?
- Will a global economic slowdown lead acquirers to rethink their acquisition strategy?
- How has the floor price changed in the target stock during the market crash in March and the subsequent recovery?
- How does this affect the risk / return profile?
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads operated in stark contrast to the broader market this week further highlighting the diversification benefits of this event driven investment strategy. After a slow start to the week, cash merger arbitrage spreads continued their recent trend by moving higher despite a lack of significant deal related news.
No deal closures were announced during the week (although Legg Mason LM is forecasted to close in the near future) and although signs of a recovery in M&A were present with some new deals being announced, none were eligible for inclusion in the index. New blood is vital to the continuation of merger arbitrage as a consistent investment strategy. Positive performances from unfamiliar names such as EE and QGEN provided reassurance to investors. Readers are advised to check our dedicated deal pages to stay abreast of developments in recently announced deals.
The T20 index closed up for the week by 0.60% with EE providing solid gains as the deal moves towards completion. The index was comprised of an incomplete complement of 18 merger arbitrage cash deals and 3 cash positions. The winners beat the losers by a margin of 9 to 8 with 0 non-movers. The standard deviation of the individual index returns was recorded as 2.42%. This figure is below both the short term average and the medium term average figure.
Merger Arbitrage Performance Review - July 26, 2020
El Paso Electric (EE)
El Paso Electric also made its way into the best performers list again this week for the second time in recent weeks. An announcement from FERC, the Federal Energy Regulatory Commission, approving the parties’ mitigation plan was all that was needed to effectively seal this deal. Now that all regulatory approvals have been granted, it is just a mere formality for this deal to now consummate successfully.
The simple spread currently stands at 0.29%. However, a stub period dividend has been announced and will be calculated from the previous dividend payment until the closing of the deal. This currently works out as at
$0.41 / 91 days = $0.0045 per day.
The stock moved up $0.75 or 1.11% to $68.05 against an offer price of $68.25. The extended timeline associated with protected industry target stocks dissuaded us from taking a position in this target. In light of the recent news we will not be initiating a positon.
QIAGEN (QGEN)
QIAGEN was also a top performer this week. Previously we saw an increased offer from Thermo Fisher who raised their bid by 10% to 43 euros. However, the strong sales results forecast from Qiagen due to the pandemic has prompted some analysts to suggest an even higher offer would be more appropriate. Some estimates suggest the range could be as high as 48 euros to 52 euros. At the current exchange rate this would equal approximately $55.93 – $60.59.
This strong sales trend at QIAGEN can provide a unique opportunity. The floor price, the level to which a stock will return to in the event of a deal break, is being comfortably supported by these sales forecast numbers, thus altering the risk / reward profile. The possibility of a higher offer, although not guaranteed can potentially provide an attractive upside. During the week, the stock moved up $0.53 or 1.10% to $48.66 against an offer price of $50.64. We shall investigate this opportunity further, as well as the currency risk and may look to initiate a position in the coming week.
Craft Brew Alliance (BREW)
BREW continues its decline with yet another negative week. The stock continues to suffer from complications regarding the divesture of the KONA brand and Hawaiian-based operations. Despite no new deal news this week it appears investors are growing skeptical of the companies ability to fulfill their asset disposal obligations in order to pass regulatory muster.
The stock moved down $0.23 or 1.55% to $14.62. The leaves the simple spread at 12.86%. We shall maintain our position for the time being and await further developments.
SINA Corporation (SINA)
Sina was the second largest decliner in the index last week. This deal is an unsolicited offer from New Wave, a company incorporated in the British Virgin Islands. As things stand, SINA has formed a special committee to evaluate the offer. It is as yet unknown when, if any details of these findings will be made public. The stock finished down by $0.29 at $40.02, a rise of 0.72% leaving the simple spread at 2.45%. We are in no rush to open a position in this stock.
