This is the weekly Merger Arbitrage Performance Review – August 2, 2020. This report focusses on TIF, QGEN, BREW & FIT arbitrage spreads during the period 27th July – 31st 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 26th 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 – August 2, 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 - August 2, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.26% | SPY | 1.71% |
| Index Dispersion | 1.51% | VIX | (5.34)% |
| Winners | 13 | MNA | 0.25% |
| Losers | 2 | ||
Market Performance Review
Not even a GDP figure registering the worst quarterly decline on record – EVER! was enough to drag the weekly performance of the broader marker into the red last week. Although an even worse figure was expected the numbers still paint a harrowing pictures of how Covid-19 has ravaged the global economy. And yet despite this, big tech, and I mean BIG tech continues to steam ahead posting better than ever results. This coupled with strong manufacturing data from China is only ever going to have one outcome. (The answer is “UP” by the way).
The average citizen however could be forgiven for feeling slightly bemused. Negotiations in Congress have stalled as to how to continue financial assistance in the U.S. Does the performance of the market suggest it does not value consumer purchasing power as highly as it once did?
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was higher by 1.71%. During the week, the VIX behaved accordingly. By Friday, the index had fallen slightly by 5.34%.
The IQ Merger Arbitrage ETF (MNA) however finished in negative territory for the week. Delphi Technologies (DLPH) and Ingenico Group were the biggest decliners in the index. By the close on Friday, the IQ Merger Arbitrage ETF was lower by 0.25%.
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 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 also produced a positive return for the week although taking a slightly different path thus highlighting the diversification benefits of this event driven investment strategy. After a slow start to the week, cash merger arbitrage spreads extended their upward trend by moving higher despite a lack of significant deal related news.
El Paso Electric finally closed having received the last regulatory approval. The payment of the stub period dividend appeared to confuse some traders as to why the stock ceased trading above the offer price. See our extensive Merger Arbitrage focused Glossary for an explanation of this. In addition, Legg Mason LM is forecasted to close in the near future. 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 0.26% with EE providing solid gains as the deal moves towards completion. The index was comprised of an incomplete complement of 17 merger arbitrage cash deals and 3 cash positions. The winners beat the losers by a margin of 13 to 2 with 2 non-movers. The standard deviation of the individual index returns was recorded as 1.51%. This figure is significantly below both the short term average and the medium term average figure.
Merger Arbitrage Performance Review - August 2, 2020
Tiffany & Co. (TIF)
Tiffany & Co. has once again showed itself to be the nest performing cash merger arbitrage stock during the week. The company has just announced it has
received an additional regulatory approval necessary for the completion of its proposed acquisition (the “Merger”) by LVMH Moët Hennessy-Louis Vuitton SE (“LVMH”) pursuant to the Agreement and Plan of Merger, dated as of November 24, 2019 (the “Merger Agreement”), by and among Registrant, LVMH, Breakfast Holdings Acquisition Corp. and Breakfast Acquisition Corp.
On July 25, 2020, the State Administration for Market Regulation of China decided that it will not prohibit the Merger.
Given the geo-political tensions present in the world at this time, the SAMR blessing is perhaps the most significant of the remaining regulatory hurdles facing Tiffany and LVMH.
As listed in the same 8-K regulatory filing with the SEC, the remaining regulatory clearances required to complete the transaction are
the European Commission, the Japan Fair Trade Commission, the Mexican competition authority (Comisión Federal de Competencia Económica) and the Taiwan Fair Trade Commission
here is currently no further updates as to how and when any further announcements regarding the actions of these organizations will be made.
By the close on Friday, the stock had risen $3.95 or 3.25% to $125.36. The deal is now offering a simple spread return of 7.69%. This marks a solid recovery by the stock following the Women’s Wear Daily report of the LVMH board of directors meeting to discuss the takeover. The publication of that article led to much speculation about the safety of the deal and what alternative actions LVMH could pursue. This highlights an important issue traders in all disciplines and strategies need to be aware of. When news coverage and commentary become thin as activity decreases, actions that may previously have been considered insignificant, or average, become highlighted and have the potential to be blown out of proportion.
The recent renegotiation between Advent and Forescout highlights just how difficult it is to invoke a MAC clause to exit a deal. In fact, historical analysis proves this point even further. Upon conducting such analysis which Merger Arbitrage Limited does on a constant basis, traders could quite reasonably concluded the Tiffany deal was not in any significant danger of failing. The regulatory risk would remain present as ever and it is in this area that traders should have focusing their analysis.
For that reason, we were happy to take a position in Tiffany at around the $120 level and will continue to hold. The current spread is primarily a product of the pending EU regulatory clearance requirement and the time required to complete the deal. The expected completion date is current September 30, 2020. Should this be the case, stockholders will be entitled to receive one more dividend payment of $0.58. For a company that traded above $133 following the announcement of the current merger agreement we still believe this merger spread to be attractive on the current analysis.
QIAGEN (QGEN)
Despite a $0.95 decline on Friday, 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 investors are keen for the company to pursue an even higher offer. 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.
Although there was no official announcement made last week, we suspect the drop on Friday suggests the will be no further increase. We previously stated the strong sales trend at QIAGEN could provide a unique opportunity as the floor price is being comfortably supported by these sales forecast numbers producing a favorable risk / reward profile. During the week, the stock moved up $0.79 or 1.62% to $49.45 against an offer price of $50.64 when adjusted for the EUR-USD forex rate. We shall continue to monitor this opportunity.
Craft Brew Alliance (BREW)
BREW finally staged a rebound this week. The stock had been under pressure following the proposed spin-off of the KONA brand and Hawaiian-based operations in order to pacify regulators. Despite no new deal news this week it appears investors have been bargain hunting suggesting the recent sell-off has been overdone. The stock moved up $0.19 or 1.30% to $14.81. The leaves the simple spread at 11.41%. We shall maintain our position for the time being and await further developments.
Fitbit (FIT)
Fitbit was the largest decliner during the week. The company, subject to a takeover from Alphabet (GOOG, GOOGL) had previously made a pledge not to misuse Fitbit health and fitness data. It was hoped this announcement would be sufficient to convince EU regulators that the deal should be allowed to proceed as is.
However, the ever diligent European Union Commission is slated to launch an antitrust investigation into Google’s $2.1B Fitbit acquisition beginning next week. The current preliminary review period for the deal ends on August 4 and CNBC sources then claim the watchdog will start a full-scale investigation which could last 4 months. This sent the stock crashing $0.26 for the week, a decline of 3.82%. At $6.54, this leaves the simple spread at 12.39%. Despite this news, we are in no rush to sell our position. The investigation now looks extremely likely although we still believe the deal will eventually close successfully. We will continue to hold even if the deal does take longer to close than originally forecast.
