This is the weekly Merger Arbitrage Performance Review – September 6, 2020. This report focusses on WMGI, SINA, TIF & FIT arbitrage spreads during the period 31st August – 4th September. 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 30th 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 – September 6, 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 - September 6, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.37% | SPY | (2.35)% |
| Index Dispersion | 3.19% | VIX | 33.93% |
| Winners | 6 | MNA | (1.08)% |
| Losers | 11 | ||
Market Performance Review
In what would appear to make total sense to seasoned market observers; the advancement of the broader market came to an abrupt halt last week as better than expected economic data was released. Jobless claims for the week came in ahead of expectations whilst the economy added 1.4 million jobs in August. This also coincided with a 10.1% growth in productivity.
However, the fiscal stimulus and the accommodative fed policies also came at a price. The trade deficit has also increased and reached a level not seen since 2008. Traders and investors, keen to bank some of the profits gained from the Covid rally rushed for the exits on Thursday causing the broader market to drop by over 3%. The decline spilled over into Friday which at one stage was looking like it was going to be a repeat performance until a rally cut the drop on the last day of the week to just 1%.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was lower by an almost unbelievable 2.35%. The VIX also increased and by Friday had risen by 33.93%. The IQ Merger Arbitrage ETF (MNA) also declined although on a much more subdued level. Vivint Solar (VSLR) was by far the biggest loser in the index putting the return into negative territory whilst also supported by the decline in Netent. By the close on Friday, the IQ Merger Arbitrage ETF was down by 1.08%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads, unlike the broader market managed to perform well during the week. This was in large part due to the rebound in RRGB following a renewed sense of optimism for the hospitality sector.
The outlook for merger arbitrage had begun to show signs of improvement with new deals being announced. However, this view has again become clouded as deals have faded in both quantity and size over the past few weeks. The recent set back in the market might just provide a sharp reminder to M&A analysts that we are not yet out of the woods in terms of a full scale economic recovery.
The T20 index closed up for the week by 0.37% with RRGB providing a significant rise as the restaurant and hospitality sector recovers. The index was comprised of an incomplete complement of 19 merger arbitrage cash deals. The winners were defeated by the losers by a margin of 6 to 11 with 2 non-movers. The standard deviation of the individual index returns was 3.19%. This figure is in line with both the short term average and the medium term average figure.
Merger Arbitrage Performance Review - September 6, 2020
Wright Medical (WMGI)
Wright Medical was also amongst the biggest winners this week. The firm had previously announced the extension of the closing date to the tender offer from Stryker as the company was awaiting clearance from the CMA in the UK with regards to the proposed remedies to secure regulatory compliance for the deal.
This came on the morning of Wednesday September 2 when the CMA announced
The CMA currently considers that, subject to responses to the consultation required by Schedule 10 of the Act, the Proposed Undertakings will resolve the SLC identified in the SLC Decision in a clear-cut manner, ie the CMA currently does not have material doubts about the overall effectiveness of the Proposed Undertakings or concerns about their implementation
In the meantime, the stock was up $0.29 at $30.45, a rise of 0.96%. This leaves a simple spread of 0.99% for a deal, following the CMA announcement which now looks certain to close.
SINA Corporation (SINA)
Sina became the worst performer in the index this having previously seen its share price rise above the $40 per share offer from New Wave MMXV Ltd. Without any company or specific deal news announced it may be easy to assume this stock was moving inline with the broader market which exhibited increased volatility during the week. However, the move may be related to the speculation of a higher offer which failed to materialize.
The recommendation of the special committee assembled by SINA to evaluate the non-binding proposal from New Wave, a company incorporated in the British Virgin Islands is yet to be announced and it remains unknown (to investors) when, or what details will be made public. In the meantime, the stock moved lower during the week and finished down $1.26 at $39.83, a fall of 1.69%. This leaves the simple spread at 2.94%. We are in no rush to open a position in this stock.
Tiffany & Co. (TIF)
Tiffany & Co. was also another significant decliner during the week and saw its stock move lower throughout the week. The extension made to the outside date as given in the merger agreement November 24 from August 24 has been digested by the market and the focus now moves to regulatory clearance. As things stand the following competition regulators are still required to sign off on the deal
- European Commission
- Japan Fair Trade Commission
- Mexican competition authority (Comisión Federal de Competencia Económica)
- Taiwan Fair Trade Commission
The purchase of Tiffany comes at a large premium to the floor price by virtue of LVMH having to raise their offer to $135. This creates a larger downside. Negative movements in the broader market will lower this floor price and increase the potential downside even further. However, the strong recovery in the market, especially by LVMH has provided support for the floor price, or deal break price. At this point, we calculate a deal break may take the stock down to $70’s.
By the end of the week, the stock had declined $2.09 or 1.69% to $121.79. The deal is now offering a simple spread return of 10.85%. We are happy with our position in Tiffany and will continue to hold. With the aforementioned regulatory clearances still required, we expect stockholders will be entitled to receive the next dividend payment of $0.58. On current analysis, we still believe this merger spread to be attractive.
Fitbit (FIT)
Fitbit was also another top loser during the week. Despite there being no significant deal news, traders took cues from the broader market and EU competition concerns to make their trading decisions. The stock finished lower by $0.10 for the week, a fall of 1.56%. This leaves the simple spread at 16.11%. We will continue to hold even if the deal does take longer to close than originally forecast.
