This is the weekly Merger Arbitrage Performance Review – October 25, 2020. This report focusses on TIF, SINA, BITA & FIT arbitrage spreads during the period 19th October – 23rd 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 18th 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 25, 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 PXD–PE, COP–CXO, RESI, MS–EV, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - October 25, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.17% | SPY | 0.49% |
| Index Dispersion | 0.61% | VIX | 0.51% |
| Winners | 13 | MNA | 0.23% |
| Losers | 3 | ||
Market Performance Review
Stocks got of to a bad start last week suffering heavy losses on Monday from which they were not able to recover. On average volume and little news, the market trended marginally higher throughout the rest of the week but were unable to reclaim positive territory.
With just over a week to go before the election traders are trying to decide how a Biden victory may effect the business climate. However, despite being ahead in the polls, larger sums of money appear to be backing a Trump victory. At the same time, markets continue to speculate on the next round of economic stimulus and who will benefit.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was lower by 0.49%. The lack of movement throughout the week (with the exception of Monday) relative to recent times caused the VIX to remain stable and by Friday had gained just 0.51%. The IQ Merger Arbitrage ETF (MNA) finally succumbed and ended the six week winning streak. Last week’s leader was this week’s laggard. Grubhub (GRUB) which is being pursued by JustEat (TKAFY) was the most significant decliner whilst Netent also suffered. By the close on Friday, the IQ Merger Arbitrage ETF was down by 0.23%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index however produced a positive performance this week. Positive news from index stalwarts Tiffany & Co. (TIF) and Sina (SINA) were the movers of note.
With new deals being announced during the week Merger arbitrage is continuing to provide investment opportunities. However, the T20 Index has not yet regained its full quota of 20 investable deals. New stock swap deals (not covered in the T20 Index) and some smaller cash takeovers with less liquidity have also been announced which have caught our eye. We find the continuing pickup in merger activity encouraging for this investment strategy.
The T20 index closed up for the week by 0.17% with TIF providing a significant gain. The index was comprised of an incomplete complement of 18 merger arbitrage cash deals. The winners outpaced the losers by a margin of 13 to 3 with 2 non-movers. The standard deviation of the individual index returns was 0.61%. This figure is significantly below both the short term average and the medium term average figures and is representative of the quiet trading week.
Merger Arbitrage Performance Review - October 25, 2020
In Focus – Tiffany & Co. (TIF)
Tiffany & Co. continued it’s recovery during the week. The stock has been under pressure ever since LVMH, the potential suitor, made it clear the firms intention to back out of the deal. However, with Tiffany pursing an aggressive defensive strategy challenging LVMH’s criticism of the company, it appears the most likely outcome will be a deal possibly with some modifications.
After a flurry of court filings made during the previous week in preparation for the January court hearing this week saw a more subdued level of activity. Attention instead shifted to the Provisional Phase I decision to be announced by the European Commission. Should the European Commission have serious concerns regarding the deal, it choose NOT to give clearance and could open a 4 month investigation.
However, traders seem to be dismissing this possibility and continued to push the stock higher throughout the week. The focus now shifts back to the ongoing legal wrangling with LVMH. At this stage, we consider the encouraging numbers from Tiffany’s recent preliminary performance figures to put the firm in a strong position when the hearings finally begin. As the deal receives the remaining regulatory approvals there is also the possibility the deal may be resolved before legal action moves into the courts.
We continue believe the deal will eventually consummate successfully although we expect to see more volatility in the spread. As the deal closing probability increases, we maintain our stock position. By the end of the week, the stock had risen additional $0.82 or 0.67% to $123.54. The simple spread on offer from this deal is now back down below 10% at 9.29%, which excludes the dividend.
SINA Corporation (SINA)
Sina was also a strong performer this week in a rather subdued market. Despite no new deal news to report became the second best performer in the index last week. Having already seen a bid of $41 per share from New Wave in a “going private” transaction, the offer was increased previously to $43.30. Traders continued to buy into the deal and by the week the stock finished up $0.22 at $42.84, a rise of 0.56%. This leaves the simple spread at 1.07%, a level which despite the size we find mildly attractive.
Bitauto Holdings (BITA)
Bitauto also performed well during the week. Following the shareholder vote on the deal, the company unsurprisingly announced shareholders’ approval of merger agreement. A 6-K filing with the SEC stated
Approximately 88.9% of the Company’s total ordinary shares outstanding as of the close of business in the Cayman Islands on the share record date of October 9, 2020 voted in person or by proxy at the extraordinary general meeting. Each shareholder has one vote for each ordinary share. Of the ordinary shares voted at the meeting, approximately 99.9% voted in favor of the Merger Agreement, the Plan of Merger and the transactions contemplated thereby, including the Merger.
We had previously spoken of the geo-political tensions affecting the merger spread in this deal and the length of time being taken to finalize a deal. With the stock closing at $15.92 on Friday afternoon up $0.08 or 0.51%, the simple spread stands at 0.50%. The deal is currently expected to close imminently. We have already exited our position due to the narrowing of the spread.
Fitbit (FIT)
Fitbit was the worst 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 came under pressure following the announcement of a statement from the new chairman of Japan’s antitrust watchdog, Kazuyuki Furuya
If the size of any merger or business tie-up is big, we can launch an anti-monopoly investigation into the buyer’s process of acquiring a start-up (like Fitbit),
who then added,
We’re closely watching developments including in Europe
Japan has also stated it is prepared to partner with the U.S. and European regulatory agencies to combat market abuses. 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 January 8, 2021.
By the close on Friday the stock finished lower by $0.13, at $6.95, a fall of 1.84%. This still leaves the simple spread at 5.76%. We will continue to hold and still consider the spread to be an attractive investment opportunity.
