This is the weekly Merger Arbitrage Performance Review – August 16, 2020. This report focusses on BREW, QGEN, FIT & SINA arbitrage spreads during the period 10th August – 14th 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 9th 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 16, 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, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - August 16, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.25% | SPY | 0.68% |
| Index Dispersion | 1.75% | VIX | (0.72)% |
| Winners | 6 | MNA | (0.40)% |
| Losers | 9 | ||
Market Performance Review
Domestic economic data continues to underscore the markets recovery. Jobless claims continue their decline but perhaps more importantly was the retail sales figures announced during the week showing levels have returned to pre pandemic highs. This all helped propel the broader market to within a whisker of all time highs.
However, despite this upbeat display, congress is yet to agree on the latest stimulus package. Many Americans are still left wondering where they stand in terms of financial support or legal issues such as health coverage. The markets however are already looking ahead to the upcoming resumption of trade negotiations with China with new issues such as the politicization of Tik-tok and the new Hong Kong security law adding to an already tense relationship. It may be a case that reaffirmation of existing goals such as China’s commitment to buy U.S. goods will be considered a successful outcome.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was higher by 0.68%. During the week, the VIX behaved accordingly. By Friday, the index had fallen slightly by 0.72%. The IQ Merger Arbitrage ETF (MNA) however finished in negative territory for the week. NETENT AB was the biggest decliner in the index. By the close on Friday, the IQ Merger Arbitrage ETF was down by 0.40%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads also produced a positive return for the week. This was despite the continuing concerns over data privacy issues with Google’s acquisition of Fitbit. Demonstrating a steady rise throughout the week, cash merger arbitrage spreads extended their weekly upward trend by moving higher for the seventh straight week.
Although there were no deals that closed during the week from the index, the QGEN deal was abandoned. Despite this a positive performance was recorded. This price used as the exit price from the index was recorded as the opening price following the announcement. There were no new eligible deals announced during the week.
The T20 index closed up for the week by a reasonable 0.25% with BREW providing solid gains as the market speculates on a successful asset disposal. The index was comprised of an incomplete complement of 16 merger arbitrage cash deals. The losers beat the winners by a margin of 9 to 6 with 1 non-mover. The standard deviation of the individual index returns was 1.61%. This figure is significantly below both the short term average and the medium term average figure.
Merger Arbitrage Performance Review - August 16, 2020
Craft Brew Alliance (BREW)
BREW continued its recovery this week. A CTFN story was released on Friday suggesting Anheuser-Busch InBev’s (BUD) acquisition is likely to win approval on consent decree terms. The report claims
It looks like Hawaii’s attorney general may have given up opposition to the deal
The stock had been under pressure following the proposed spin-off of the KONA brand and Hawaiian-based operations in order to pacify regulators. The stock moved up $0.68 or 4.56% to $15.60. This still leaves an attractive simple spread of 5.77% should the report be true. The deal currently has a tentative expected closing date in the third quarter of 2020. We reaffirm our previous declaration and maintain our position in the stock for the time being.
QIAGEN (QGEN)
Despite Thermo Fisher allowing the acquisition of Qiagen to lapse following the close of the tender offer, the target stock still managed to post a positive return for the week. Upon the opening of the stock market on Wednesday morning following the announcement of the tender offer result, the stock traded at $49.01 a rise of 3.59% from the previous week. In fact, a buy note from Deutsche Bank on Friday subsequently took the stock even higher.
We had previously discussed how some stockholders were against the current bid even though the offer had already been revised higher by 4 euros. The low tender levels of stock had indicated that a successful buyout was in jeopardy leading to some market observers speculating on the possibility of yet another increased offer.
This situation highlights two important points of which merger arbitrageurs should be aware. Firstly, trader should research the acquirer and their motivations. TMO has already won plaudits from some investors for their disciplined approach to buyouts. An approach that has seen them not give in to investor pressure an overpay for a target. Buyers remorse is an all too common situation in mergers & acquisitions.
Secondly, understand the risks involved in merger arbitrage and invest accordingly. In this case the downside, or maximum loss that would be incurred by the trader if the deal should fall apart should be known (within reason) at all times. A strong performing company with the potential of alternative suitors (should the deal at hand not consummate successfully) and a strong investor base calling for a higher offer will culminate in supporting a higher floor price, thus lowering investment risk.
It may appear like these two issues offset each other and to a certain extent they do, however, the lower risk would have made for an attractive investment despite the lower possibility of a successful tender offer or the absence of a higher bid.
This analysis is of course made with the benefit of hindsight. Looking back we should maybe have taken a larger position. However, continued analysis is how we improve and adapt our strategy for the ever changing investment landscape especially in these unique times.
Fitbit (FIT)
Following last week’s announcement of earnings Fitbit continued its decline as the weight of the EU Competition Commission investigation drags the stock lower. In a relatively quiet week (news wise), the stock was lower by $0.13 for the week, a decline of 2.01%. This leaves the simple spread at 15.93%. The combination of a lower DCP and extended forecast completion date have forced the stock lower. We will continue to hold even if the deal does take longer to close than originally forecast.
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 and makes only the second appearance in our analysis. As we commented last week, 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. In the meantime the stock has drifted lower following the initial bounce on the takeover announcement. The stock finished down by $0.42 at $39.60, a rise of 1.05% leaving the simple spread at 3.54%. We are in no rush to open a position in this stock.
