This is the weekly Merger Arbitrage Performance Review – August 9, 2020. This report focusses on WUBA, QGEN, BITA & FIT arbitrage spreads during the period 3rd August – 7th August. 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 2nd August 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 TDOC–LVGO, CVX–NBL, ADI–MXIM, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - August 9, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.44% | SPY | 2.50% |
| Index Dispersion | 3.05% | VIX | (9.20)% |
| Winners | 10 | MNA | 0.50% |
| Losers | 6 | ||
Market Performance Review
Economic data was presented in a more upbeat manner this week as the number of jobs created in July surpassed estimates. The 1.76m new jobs helped business activity for the service sectors and in turn helped the markets continue to power ahead. Despite the long road ahead, the slow and steady headline increase in employment is all the markets wants to hear. The fine print will be dealt with at another time.
The average citizen however can still be forgiven for feeling slightly bemused. Negotiations in Congress have ceased in stalemate as to how to continue financial assistance in the U.S. as neither side is willing to cede ground at the negotiating table. As many Americans face economic uncertainty it is still too early to judge the economic impact of this forecast hit to consumer purchasing power.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was higher by 2.50%. During the week, the VIX behaved accordingly. By Friday, the index had fallen slightly by 9.50%.
The IQ Merger Arbitrage ETF (MNA) also finished in positive territory for the week. Delphi Technologies (DLPH) and was the biggest gainer in the index. By the close on Friday, the IQ Merger Arbitrage ETF was up by 0.50%.
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.
Although there were no deals that closed during the week from the index, MEET was removed as the spread has moved below $0.05. With the addition of Jernigan Capital (JCAP), the index has increased the average available spread and the extended the expected completion date, whilst still registering a positive performance for the week.
The T20 index closed up for the week by a healthy 0.44% with RRGB providing solid gains as the services sector recovers. The index was comprised of an incomplete complement of 16 merger arbitrage cash deals. The winners beat the losers by a margin of 10 to 6 with 0 non-movers. The standard deviation of the individual index returns was 3.05%. This figure is below the short term average but inline with the medium term average figure.
Merger Arbitrage Performance Review - August 9, 2020
58.com (WUBA)
A press release on Friday detailing the time and place for the company’s extraordinary general meeting sent the stock higher as this deal moves towards its final conclusion. To quote from the official press release
has called an extraordinary general meeting of shareholders (the “EGM”), to be held on September 7, 2020 at 10:30 a.m. (Beijing time), at Building 105, 10 Jiuxianqiao North Road Jia, Chaoyang District, Beijing, China, to consider and vote on, among other things, the proposal to authorize and approve the previously announced agreement and plan of merger (the “Merger Agreement”) , dated June 15, 2020
The announcement goes on to say
The Company’s board of directors (the “Board”), acting upon the unanimous recommendation of a committee of the Board, composed solely of directors who are unaffiliated to the management of the Company, or to any person participating as a buyer or rollover shareholder in the Merger, authorized and approved the execution, delivery and performance of the Merger Agreement
Following this announcement, there seems little that could possibly derail this deal. Accordingly, by the end of the week the stock finished up by $0.43 at $55.80, a rise of 0.78% leaving the simple spread at a mere 0.36%. This deal has an original expected completion date of H2 2020 but a completion date in early September now looks like a given. We decided not to take a positon in this stock when the spread was wider, an analysis which now looks to have been a little too cautious. However the spread has performed well for investors and shows the benefits of how foreign takeover targets trading as ADR’s on an American exchanges can provide valuable diversification options when constructing a portfolio.
QIAGEN (QGEN)
Despite a $0.44 rise on Friday, QIAGEN was the top decliner this week. Announcing results on Tuesday the EPS were revealed to be inline whilst the was a small beat on revenue estimates. A solid set of results given the circumstances which should have seen the stock move higher. However, although we previously saw an increased offer from Thermo Fisher who raised their bid by 10% to 43 euros to help ensure the deal gets completed, a filing during the week stated
As of August 7, 2020, 14:00 hours (local time Frankfurt am Main, Germany) / 8:00 hours (local time New York, United States) (the “Reference Date”), the Offer has been accepted for 39,127,376 QIAGEN Shares (approximately 16.95% of the share capital and voting rights of QIAGEN).
Although this acceptance figure had been increasing during the week, traders were still becoming a little nervous and began selling their positions.
Meanwhile, Davidson Kempner Capital Management reported an 8% holding in the firm. This equates to 18,253,052 ordinary shares. Davidson has also reportedly sent a letter to Qiagen’s board stating how it opposes the Thermo Fisher Scientific’s (TMO) tender offer of €43 ($51) per share and claims the price offered is at a material discount to fair value.
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. However, the currency effects must be taken into account and depending on when a currency hedge is initiated (if at all) could greatly effect the individual profitability for each trader. We believe this stock currently offer an attractive buying opportunity. We shall publish further analysis in time and in the meantime we will look to establish a positon in this stock in the coming week. As of the close on Friday, the stock moved down $2.14 or 4.33% to $47.31 against an offer price of $50.69 when adjusted for the EUR-USD forex rate.
Bitauto Holdings (BITA)
Bitauto also declined during the week. There was no specific deal news to report although a new SEC filing did show a position of 500,000 shares taken by SERENE VIEW INVESTMENT LIMITED representing 0.70% of the outstanding shares. We had previously spoken of the geo-political tensions affecting the merger spread in this deal and the length of time being taken to finalize a deal. However, an agreement is now in place to take the company private at $16 per ADR. With the stock closing at $15.70 on Friday afternoon down $0.18 or 1.13%, the simple spread stands at 1.91%. The deal is currently expected to close in H2 2020. If we take the mid-point of this date range we get an annualized spread of approximately 6.7%. We have already exited our position due to the narrowing of the spread. It is unlikely, although not impossible that we will initiate a new position.
Fitbit (FIT)
Also announcing results during the week was Fitbit. The company posted better than expected results for both EPS and revenue. However, on the back of the recent announcement by the EU Competition Commission to initiate a full investigation into the Google (GOOG) takeover, the stock continued its decline. By Friday, the stock was lower by $0.07 for the week, a decline of 1.07%. We will continue to hold even if the deal does take longer to close than originally forecast.
