This is the weekly Merger Arbitrage Performance Review – October 18, 2020. This report focusses on TIF, FIT, AMAG & ACIA arbitrage spreads during the period 12th October – 16th 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 11th 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 18, 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 18, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.44% | SPY | 0.14% |
| Index Dispersion | 1.48% | VIX | 9.64% |
| Winners | 13 | MNA | 0.71% |
| Losers | 4 | ||
Market Performance Review
Stocks just managed to hang on to a positive weekly performance despite a decline from intraday highs on Friday. The market had previously turned red on Thursday following a low opening but had rallied back by the end of the day. Hope remains that a stimulus packages is forthcoming as the market reacts to each whim of speculation on the subject.
Mildly conflicting economic news came in the form of improving retail sales figures which provided some unexpected encouragement. However, jobless claims were also higher than expected as the jobs market continues to slow. Fears continue to grow regarding the escalating number of new Covid-19 cases and the lack of an effective vaccine.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was higher by just 0.14%. The oscillation throughout the week caused the VIX to climb higher by almost the exact decline exhibited last week and by Friday had gained by 9.64%. The IQ Merger Arbitrage ETF (MNA) rallied again for the sixth week in a row. Grubhub (GRUB) which is being pursued by JustEat (TKAFY) was the most significant gainer whilst Tiffany & Co. (TIF) also performed well. By the close on Friday, the IQ Merger Arbitrage ETF was up by 0.71%.
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 index stalwarts Tiffany & Co. (TIF) and Fitbit (FIT) were the movers of note.
Merger arbitrage is continuing to provide investment opportunities for those willing to do the research. Although there has been a number of stock swap deals (not covered in the T20 Index) some cash deals have also been announced which have caught our eye. In the meantime deals continue to close suggesting the Covid-19 pandemic is having a less severe effect on deal closing probability than first feared. The exception to this is of course Tiffany which is currently suing LVMH for specific performance ie to close the deal.
The T20 index closed up for the week by 0.44% with TIF providing a significant gain. The index was comprised of an incomplete complement of 19 merger arbitrage cash deals. The winners won out by a margin of 13 to 4 with 2 non-movers. The standard deviation of the individual index returns was 1.48%. This figure is significantly below both the short term average and the medium term average figures.
Merger Arbitrage Performance Review - October 18, 2020
In Focus – Tiffany & Co. (TIF)
Tiffany & Co. sparkled during the week as a number of news items encouraged investors to increase the deal closing probability. LVMH, the potential suitor, has for some time made it clear the firms intention to back out of the deal. However, with Tiffany pursing specific performance from LVMH through legal channels, it looks like a deal of at least some description will be struck.
A court filing made on Tuesday afternoon by Tiffany which was responding to the LVMH countersuit states LVMH
pivoted to a new corporate strategy regarding its acquisition of Tiffany so as to explore every available avenue to evade LVMH’s contractual obligations and attempt to pressure Tiffany to agree to a price cut.
With regards to the infamous letter received by LVMH from the French Government (the French version which as yet remains confidential), Tiffany went on to claim
LVMH’s solicitation of a letter from the French government to be employed as a means to walk away from LVMH’s contractual obligations was a flagrant breach of the merger agreement. So, too, were Bernard Arnault’s admitted meeting with the French foreign minister to discuss the letter without advising Tiffany beforehand and LVMH’s admitted failure to lift a finger to seek the retraction of the French foreign minister’s request.
Following this, and LVMH’s refusal to disclose the letter in French, on Wednesday it was reported by Reuters that the EU Competition Commission was set approve the deal. Officially, the EC is scheduled to decide on the deal before October 26. Neither the EU nor Tiffany have so far commented on this report.
Then on Thursday, in a press release, Tiffany reported strong preliminary sales and operating results for August and September. The announcement which was widely seen a further strengthening its hand in its upcoming courtroom battle with LVMH stated
While we still expect full-year results to be substantially impacted by COVID-19, we are very pleased with the way the business has rebounded following the first quarter and continues to rebound in the third quarter, especially in Mainland China, and to recover in the United States.
This sent the stock soaring higher by more than $2.60 on the day.
The Situation as it Stands
It appears with the language being used that Tiffany seems by far the more confident should this deal be decided by a legal decision. However, as we previously stated, Bernaud Arnault is a shrewd operator and it seems unlikely he would embark upon a futile endeavor to avoid altering the deal if he did not believe he could benefit from it. The damage done to LVMH’s reputation by reneging on an agreed deal may end up being all for nothing. The involvement of the French Government and the mysterious letter could also provide additional surprises. Despite this subject slipping from the limelight recently, as noted by Tiffany, we continue to suspect there will be further revelations.
Although we believe the deal will eventually consummate successfully, we envisage the journey to be a volatile ride. Even an agreement between the parties, thus avoiding a court battle, even if a lower price was agreed the negotiations could prove tricky. In this rare instance, we may look to take an option position (initially delta neutral) to take advantage of the potential volatility. In addition to this, we maintain our stock position for the time being. By the end of the week, the stock had risen $4.23 or 3.57% to $122.64. The deal is now offering a simple spread return of 10.08%, which excludes the dividend.
Fitbit (FIT)
Fitbit was another top performer from our index of the largest cash merger arbitrage spreads this week. The stock which had taken a breather following its run-up back to the $7 level moved forward again on positive deal news. The stock had previously traded significantly lower when news of the involvement of the EU Antitrust Authority first became public. This investigation was scheduled to conclude by December 23, 2020 but has now since been extended to January8, 2021.
Sources close to the deal claim the EU has not sent a list of concerns to Google (a good sign) and that the deal is on track to receive approval. By the close on Friday the stock finished higher by $0.21, at $7.07, a rise of 3.06%. This still leaves the simple spread at 3.96%. We will continue to hold and still consider the spread to be an attractive investment opportunity.
AMAG Pharmaceuticals (AMAG)
AMAG Pharmaceuticals also made it into the top performers list this week. The firm is currently the takeover target for Covis Group. Despite there being a plethora of investigations being announced during the week by shareholder rights lawyers, the stock moved forward on news that the tender offer had commenced. This tender offer is scheduled to conclude on November 12, 2020 and it is not expected there will be any issues in consummating the deal successfully.
During the week, the stock climbed $0.30 to $13.63. A rise of 2.25%. This leaves the simple spread at just 0.88%. We have no position.
Acacia Communications (ACIA)
Acacia Communications suffered from political tensions during the week to become one of the T20 Index’s worst performers. We have previously questioned the progress of this deal as political wrangling between the U.S. and China effect the ability of firms to obtain regulatory clearance. Despite stories claiming it is imminent, Dealreporter claimed on Friday China is delaying deal approvals. We stand by our previous analysis
We scaled back our ACIA position as we felt the spread had narrowed significantly. Following this decline we may look to top up our positon on weakness ahead of any potential regulatory announcement.
By Friday, ACIA had fallen $0.25 or 0.37% for the week to $67.49 giving a simple spread of 3.72%. We may look to add to our position on additional weakness.
