This is the weekly Merger Arbitrage Performance Review – September 13, 2020. This report focusses on ACIA, ADSW, HUD & TIF arbitrage spreads during the period 8th September – 11th 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 6th September 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 13, 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 13, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | (0.76)% | SPY | (2.42)% |
| Index Dispersion | 2.42% | VIX | (12.62)% |
| Winners | 5 | MNA | 0.50% |
| Losers | 12 | ||
Market Performance Review
The broader market continued its decline for the second week as once again tech stocks came under heavy selling pressure. The Nasdaq is now 10% lower than the recent new high set just over a week ago.
There was no significant economic news released during the holiday shortened trading week (follow this link for an up-to-date international stock market holiday calendar) to which traders could point to as a catalyst for the sell off. However, following the decline from the prior week which ended an impressive run up (the Covid recovery) it seems normal that traders would be keen to take some money off the table. There is still the ongoing debate as to the size of the next stimulus package and the recovery in the domestic job market may also have ground to halt.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was lower by an almost unbelievable 2.42%. The VIX also decreased and by Friday had fallen by 12.62%. However, the IQ Merger Arbitrage ETF (MNA) rallied to provide some positive relief. Vivint Solar (VSLR) was by far the biggest gainer in the index putting the overall return into positive territory whilst being supported by the rise in Navistar (NAV). By the close on Friday, the IQ Merger Arbitrage ETF was up by 0.50%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Portfolio, like the broader market also managed to perform negatively during the week. This was in large part due to the fall in RRGB and the decision by LVMH to try and get out of the Tiffany & Co. (TIF) acquisition.
However, the outlook for merger arbitrage continues to show brief signs of improvement with new deals being announced such as the acquisition of Rosetta Stone during the previous week. However, during the shortened week there was less M&A activity than one would normally expect. It will be interesting to note if the recent set back in the market will have any effect on M&A activity going forward
The T20 index closed down for the week by 0.76% with TIF providing a significant decline as the deal is placed in jeopardy. The index was comprised of an incomplete complement of 17 merger arbitrage cash deals. The winners were defeated by the losers by a margin of 5 to 12 with 0 non-movers. The standard deviation of the individual index returns was 2.42%. This figure is below both the short term average and the medium term average figures.
Merger Arbitrage Performance Review - September 13, 2020
Acacia Communications (ACIA)
Acacia Communications was this week’s biggest winner. We previously scaled back our ACIA position as we felt the spread had moved too far for that point in the deal timeline. However, we did not take advantage of the pull back to top up our position. Although there was no new deal news announced during the week, judging by this week’s rise, we expect some kind of announcement to be made soon. By Friday, ACIA had risen 2.50% for the week to $68.48 giving a simple spread of 2.20%.
Advanced Disposal Services (ADSW)
Advanced Disposal Services (ADSW) is a deal which has now been live for over a year but has only recently begun to receive more coverage. Although there was no new deal news announced during the week, the stock still managed to become the second best performer in the index. The deal remains subject to the asset disposal as stipulated by the DoJ. This caused the stock to rise during the week by $0.26 or 0.87% to $30.19.
Hudson (HUD)
Hudson is a recently announced deal that has once again performed well during the previous week. The offer is from Dufry AG Group, a 57.4% shareholder of Hudson, who wants to acquire the remaining equity interests for $7.70 in cash for each Hudson share. The stock finished up $0.04 at $7.62, a rise of 0.53% leaving the simple spread at 1.05%. We are yet to fully analyze this deal. Although as should be obvious from the start, a stock purchase of this kind such as a large initial toe hold has an extremely high DCP which is why we have seen the spread close rapidly. This also explains the resilience to negative movements in the broader market. We are therefore in no rush to open a position in this stock.
Tiffany & Co. (TIF)
Tiffany & Co. was the most significant decliner during the week. The stock had been the subject of rumors suggesting LVMH may try to exit the deal for some time. The only question that remained was how could they do it? In a press release issued early that morning LVMH claim
The Board learned of a letter from the French European and Foreign Affairs Minister which, in reaction to the threat of taxes on French products by the US, directed the Group to defer the acquisition of Tiffany until after January 6th, 2021. Furthermore, the Board noted Tiffany & Co.’s requested to extend the “Outside Date” in the Merger Agreement from November 24th to December 31st, 2020.
As a results of these elements, and knowledge of the first legal analysis led by the advisors and the LVMH teams, the Board decided to comply with the Merger Agreement signed in November 2019 which provides, in any event for a closing deadline no later than November 24th, 2020 and officially records that, as it stands, the Group LVMH will therefore not be able to complete the acquisition of Tiffany & Co.
In response, Tiffany, in a 8-K filing with the SEC made shortly afterwards noted
The Merger Agreement does not excuse LVMH from completing the merger merely because a government minister has requested that LVMH breach the Merger Agreement. Further, Tiffany believes this latest development represents nothing more than LVMH’s most recent effort to avoid its obligation to complete the transaction on the agreed terms, not dissimilar from LVMH’s baseless, opportunistic attempts to use the U.S. social justice protests and the COVID-19 pandemic to avoid paying the agreed price for Tiffany shares.
The Material Adverse Effect clause in the Merger Agreement is narrowly defined and, notwithstanding LVMH’s focus on the COVID-19 pandemic and the U.S. social justice protests, the impact of these events cannot even be taken into account in determining whether an MAE has occurred under the Merger Agreement. In fact, during the pandemic, Tiffany’s financial results compare favorably with those of other firms in the luxury goods industry, including LVMH itself. Tiffany has been a responsible steward of its business, all the while taking great care to protect the health and safety of its customers and employees.
It appears that LVMH’s case rests on the issue of language used. An “order” from the French Government means LVMH are not required to close the deal. Whether the letter meets this criteria will be a matter for the courts. In addition, LVMH is expected to claim mismanagement of the company during the merger process. However, as we have pointed out previously, sales and expected sales by Tiffany & Co. have recovered. The stock prices of comparable companies such as Pandora and even LVMH have increased significantly and trade at or above the pre-covid levels. We therefore believe any MAE or mismanagement will be extremely hard to prove.
In the meantime, Japan Fair Trade Commission and Mexican competition authority (Comisión Federal de Competencia Económica) granted clearance for the deal. Additional competition regulators such as the European Commission and Taiwan are still forthcoming.
The most likely solution then is negotiation and possibly a lowering of the offer price. Remember the original offer price was $120 per share. Tiffany have stated they are
seeking to expedite the Delaware proceedings to obtain a ruling prior to November 24, 2020
With this outside date in mind, we will stick with our position for the time being but will watch the story meticulously. By the end of the week, the stock had declined $7.98 or 6.55% to $113.81. The deal is now offering a simple spread return of 18.62%. We expect stockholders will be entitled to receive the next dividend payment of $0.58.
