This is the weekly Merger Arbitrage Performance Review – November 1, 2020. This report focusses on TIF, FIT, ACIA & CBB arbitrage spreads during the period 26th October – 30rd 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 25th 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 – November 1, 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 DNKN, IPHI–MRVL, AMD–XLNX, PXD–PE, COP–CXO, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - November 1, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.09% | SPY | 5.48% |
| Index Dispersion | 2.21% | VIX | 38.00% |
| Winners | 13 | MNA | 0.32% |
| Losers | 6 | ||
Market Performance Review
Major stock indices suffered extensive losses last week as a number of unresolved factors moved further from a satisfactory outcome. The major U.S. indices saw the largest decline since the Covid crash in March and the speed of the decline caught some market commentators napping.
As the election looms near it now appears unlikely a stimulus package will be agreed to in the very near future. This of course gives both sides of the aisle to blame the other but leaves the wider economy in a state of limbo. Exaggerating this is the unprecedented rise in positive Covid-19 test results. Many fear this will lead to a new total shutdown of the economy to curb the spread and relieve the stress on medical services. Decisions such as this have already been made across much of western Europe.
One bright spot is the recovery in GDP announced during the week, although this widely signaled economic figure is often priced into the market long before the official announcement is made. The durability of this recovery along with the job market will now be questioned ever more closely as the second wave persists.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was lower by 5.48%. This sharp movement naturally caused the VIX to spike and by Friday had gained 38.00%. The IQ Merger Arbitrage ETF (MNA) however managed to buck the trend. As discussed below, this positive performance was largely due to the renegotiated terms of the LVMH-TIF deal which almost certainly assures the takeover will consummate in the very near future and the confirmation by Corelogic (CLGX) that it is in takeover talks. By the close on Friday, the IQ Merger Arbitrage ETF was up by 0.32%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index also produced a positive performance this week. A conclusion to the long running LVMH-Tiffany & Co. (TIF) saga provided a significant boost.
New stock deals of significant size continue to be announced although there are still not as many cash only deals as we would have hoped for at this stage. However, the announcement of the Dunkin’ Brands takeover late on Friday (which makes it ineligible for inclusion to the T20 Index) is promising. T20 Index has not yet regained its full quota of 20 investable deals. We had found the continuing pickup in merger activity encouraging but in light of the increase in Covid activity we suspect another decline to be forthcoming.
The T20 index closed up for the week by 0.05% with TIF providing a significant gain. The index was comprised of an incomplete complement of 19 merger arbitrage cash deals. The winners outpaced the losers by a margin of 13 to 6 with 0 non-movers. The standard deviation of the individual index returns was 2.21%. This figure is inline with the short term average and marginally above the medium term average figure.
Merger Arbitrage Performance Review - November 1, 2020
Tiffany & Co. (TIF)
Tiffany & Co. dominated the headlines this week as it was announced the firm and potential suitor LVMH had agreed to a minor price cut in order to consummate the deal. This latest agreement avoids any legal action and as such the deal is expected to close in early 2021 according the filing.
Not to blow our own trumpet, but we had postulated this outcome and stated our position clearly.
The deal is now valued at $131.50 per share providing a handsome return to traders who followed our analysis and stayed with their positions. All regulatory approvals have now been received clearing the way for consummation.
By the end of the week, the stock had risen additional $7.30 or 5.91% to $130.84. The simple spread on offer from this deal is now 0.50% which excludes the dividend. We expect to stay with our positon until the deal closes.
Fitbit (FIT)
Despite the larger movements in the broader market, merger arbitrage cash deals were not as active as one might think. Fitbit however, a stalwart of the Merger Arbitrage Limited T20 Index did register an important 8-K filing with the SEC during the week.
The takeover offer from Alphabet (Google GOOG, GOOGL) is currently under review from the European Commission and has caused traders to reevaluate their forecast closing date for the deal. On top of this, the new chairman of Japan’s antitrust watchdog, Kazuyuki Furuya recently said
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)
The EU investigation was scheduled to conclude by December 23, 2020 but has now since been extended to January 8, 2021. In light of this the filing made by Fitbit stated
On October 26, 2020, the “End Date” under the Agreement and Plan of Merger dated as of November 1, 2019 (the “Merger Agreement”) by and among Fitbit, Inc., Google LLC, and Magnoliophyta Inc., was extended to February 1, 2021. Fitbit and Google continue to work toward obtaining required regulatory clearances and consummating the transactions contemplated by the Merger Agreement.
The market reacted positively to this announcement although in light of the previous investigation extension announced by the EU, the Fitbit announcement wasn’t unexpected. It does however continue to reassure traders that the companies involved are doing what is required to still get this deal done.
By the close on Friday the stock finished higher by $0.09, at $7.04, a rise of 1.29%. This still leaves the simple spread at 4.40%. We will continue to hold and still consider the spread to be a reasonable investment opportunity especially on an annualized basis.
Dunkin (DNKN)
Just a quick note on Dunkin here. The stock is not yet included in the T20 Merger Arbitrage Index as the deal was announced after the close of business on Friday. Therefore traders have not had a reasonable chance to add this stock to their portfolios. The guiding principle of the T20 Index is Investability, thus traders can reasonably expect to invest in stocks in an orderly fashion. By looking at the returns from our index, traders are then able to judge what level of return is practically available when executing a cash deal merger arbitrage strategy. We would fully expect this deal to be included in next weeks list.
The firm is subject to a tender offer from Inspire for $106.50. It is generally expected Friday’s closing price of $99.71 will rise close to this value in pre-market trading on Monday.
Cincinnati Bell (CBB)
A rare mention for Cincinnati Bell this week. The stock was one of the worst performers in the Index and by the close on Friday had finished lower by $0.09, at $15.05, a fall of 0.59%. This leaves the simple spread at 2.99%.
Despite there being no new deal news announced for the stock we assign the decline to the influence of the broader market. We do not currently hold a position but may consider the spread to be an attractive investment opportunity in the future.
