This is the weekly Merger Arbitrage Performance Review – October 11, 2020. This report focusses on VRTU, TIF & IMMU arbitrage spreads during the period 5th October – 9th October. 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 4th October 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 – October 11, 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 MS–EV, MYOK, SOGO, AIMT, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - October 11, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 1.02% | SPY | 3.88% |
| Index Dispersion | 1.91% | VIX | 9.52% |
| Winners | 15 | MNA | 0.74% |
| Losers | 4 | ||
Market Performance Review
Stocks powered higher throughout the week and remained in positive territory at the end despite an initial setback on Tuesday. The speedy recovery of the President having previously contracted the Covid-19 virus has helped allay market fears of a downturn. This in turn caused the market to rally fueled by speculation that a new stimulus package will be agreed upon closer to the level the Democrats had been pushing for. The result was one of the best weekly performances since July.
The latest news suggest the president is prepared to raise the package to $1.8bn but is still short of the $2.2dn deal already agreed upon on the house. It remains a difficult call as to whether the President’s bargaining strategy will be to agree to a complete stimulus package before the election.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was higher by 3.88%. The impressive rally caused the VIX to decline and by Friday had lost by 9.52%. The IQ Merger Arbitrage ETF (MNA) rallied again for the fifth week in a row. Netent was a significant gainer and the closing of the Sunrun (RUN) and Vivint Solar (VSLR) merger also provided healthy gains. By the close on Friday, the IQ Merger Arbitrage ETF was up by 0.74%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Portfolio, also produced a positive performance this week. Positive news from the Virtusa (VRTU) acquisition and a recovery in Tiffany & Co. were the movers of note.
The outlook for merger arbitrage continues to strengthen. As previously mentioned, a record number of M&A deals were announced during the previous quarter and this looks likely to continue into the final stretch of the year. A number of opportunities have begun to appear although many recently announced deals have seen their spreads close dramatically upon announcement of the deal.
The T20 index closed up for the week by 1.02% with VRTU providing a significant gain. The index was comprised of an incomplete complement of 19 merger arbitrage cash deals. The winners outplayed the losers by a margin of 15 to 4 with 0 non-movers. The standard deviation of the individual index returns was 1.91%. This figure is significantly below both the short term average and the medium term average figures.
Merger Arbitrage Performance Review - October 11, 2020
In Focus – Virtusa (VRTU)
Virtusa was one of the strongest performers for the week from our index of cash merger arbitrage spreads. This
seldom covered stock is currently the subject of a $51.35 per share takeover offer from Baring Private Equity Asia. The deal was formally announced a month ago.
This stock has been moving ahead nicely and has already provided traders with some healthy profits. At the close on Friday, the stock had advanced $1.07 for the week, a rise of 2.17%. The simple spread now stands at 2.05%. On October 2, the company held its annual general and subsequently announced in an 8-K SEC filing all votes had gone as expected.
However, what is of interest to arbitrageurs, and the driver behind this weeks positive performance is the announcement that
it has entered into an agreement with New Mountain Vantage Advisers, L.L.C. (“NMV”), which economically owns approximately 10.8 percent of Virtusa’s outstanding common stock, regarding the election of directors and Virtusa’s pending acquisition by BPEA.
Pursuant to the agreement, NMV has withdrawn its nominations for directors at the Company’s 2020 Annual Meeting of Stockholders (the “Annual Meeting”). Following the Annual Meeting, which was held on October 2, 2020, the Virtusa Board has appointed Patricia “Patty” Morrison as a new independent director, effective immediately.
Additionally, NMV has entered into a voting agreement under which NMV will vote in favor of the previously announced transaction with Baring Private Equity Asia (BPEA) under which BPEA will acquire Virtusa for $51.35 per share in cash. The BPEA transaction remains on track to close in the first half of 2021.
This now clear the way for the merger to proceed, at least as shareholders are concerned. However, what is of even more importance is the final line from announcement from NMV which says
our independent nominee Patty Morrison, will give due consideration to any superior proposals that may arise in a manner consistent with the terms of the merger agreement
Investors are viewing this deal with the possibility of a superior proposal forthcoming. The expected completion date is H1 2020, because of the regulatory clearances needed from CFIUS, Australia, New Zealand, Germany & India as well as HSR. The current annualized return is approximately just over 2.6%. If the deal was to close in 6 months, the return moves up to 4.1%.
We currently have a small position in this stock but we rarely speculate on the possibility of higher bids. Should the stock move up further we will trim our position unless their is reasonable evidence to suggest an alternative bid is likely. Should the stock move down however as traders take profits, we may decide to top up our position.
Tiffany & Co. (TIF)
Tiffany & Co. moved up during the week as the firm announced it had received regulatory approval from Taiwan. In the same filing the firm reiterated the current position with LVMH stating
Registrant filed a lawsuit in the Court of Chancery of the State of Delaware (the “Court”) against LVMH and certain of its affiliates seeking, among other things, an order of specific performance requiring LVMH to perform its obligations under the Merger Agreement, and the Court set January 5, 2021 to begin a four-day trial.
We still believe the most likely solution then is negotiation and possibly a lowering of the offer price. By the end of the week, the stock had risen $2.30 or 1.98% to $118.41. The deal is now offering a simple spread return of 14.01% which excludes the dividend.
Immunomedics (IMMU)
Immunomedics also made it into the top performers list this week. The firm is currently the takeover target for Gilead Sciences (GILD). Despite there being no significant takeover news announced during the week the stock climbed $0.92 to $86. A rise of 1.08%. This leaves the simple spread at 2.33%.
Nil Point!
See ya next time!
