This is the weekly Merger Arbitrage Performance Review – November 15, 2020. This report focusses on FIT, NAV, SINA & PNM arbitrage spreads during the period 9th November – 13th November. 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 8th November 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 15, 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 15, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.36% | SPY | 2.25% |
| Index Dispersion | 0.50 | VIX | 7.08% |
| Winners | 16 | MNA | 2.06% |
| Losers | 2 | ||
Market Performance Review
The broader market built upon the extensive gains made in the prior period as news reached the market of a potential vaccine for Covid-19. This announcement sent the market into dizzying heights setting a new all-time high Monday morning. Despite subsequent profit taking and extensive sector rotation from fund managers the markets were able to hang on to a sizable chunk of these gains throughout the rest of the week.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was higher by 2.25%. This upward naturally caused the VIX to decline and by Friday was lower by 7.08%. The IQ Merger Arbitrage ETF (MNA) on the other hand had a disastrous week. The ETF which often performs well during upward swings in the broader market because of its unhedged positions in stock swap deals, was almost singlehandedly bought down by Netent (NET-B.ST). An announcement on Monday saw the Swedish based stock decline 5%, a fall which the MNA, despite positive performance from Concho Resources (CXO) and Parsley Energy (PE) was unable to recover. By the close on Friday, the IQ Merger Arbitrage ETF was down by 2.06%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index produced a positive performance this week. In contrast to the MNA ETF, the T20 Index was able to remain in the green despite the ever decreasing return available to cash merger arbitrage spreads.
One deal closed during the week, Wright Medical (WMGI) and there was the addition of one new deal in the index, in the form of Urovant Sciences (UROV).
As previously mentioned, when a market performs this well in such a short period of time it is usual for cash spreads to also exhibit a sizable increase. However, this is becoming increasingly difficult as cash spreads tighten. This appears to be the case as far as out T20 Index is concerned. As spreads narrow, the potential downside increases. We again caution traders not to chase spreads simply to employ capital when the risk/reward ratio is moving against them in this manner.
The T20 index closed up for the week by 0.36% 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 16 to 2 with 1 non-mover. The standard deviation of the individual index returns was 0.50%. This figure is below both the short term average and the medium term average figure.
Merger Arbitrage Performance Review - November 15, 2020
In Focus – Navistar (NAV)
Navistar was again a strong performer during the week as deal terms were revised once more to effectively clinch the deal. The latest offer sees a cash payment of $44.50 for each Navistar share payable by Traton. This is a $1.20 increase on the previous offer of $43.40 which itself was the culmination of a number of previous offers.
Major stockholders such as MHR Fund Management LLC and Carl Icahn have agreed to vote their holding in accordance with the deal as the following SC13 D/A filing with the SEC shows
On November 7, 2020, the Reporting Persons (Icahn) and the Issuer entered into a Voting and Support Agreement, with TRATON SE
Traton itself also owns approximately 1/6 (16.7%) of the outstanding Navistar stock and has an existing business relationship with the target. The Navistar board of directors are now also firmly on board with the deal
The Board strongly believes that a transaction with TRATON delivers compelling, immediate and substantial cash value to shareholders.
The deal, which from a regulatory standpoint does not have many hoops to jump through does however require CFIUS approval. Along with HSR clearance and other customary closing conditions, the expected completion date is given as mid 2021. Financing is not considered to be an issue and is supplied by Volkswagen Group.
However, the market implied deal closing probability is already close to 100%. Unfortunately for merger arbitrageurs, the higher the DCP, the lower the potential return. Navistar does not current pay a dividend, so the annualized return for this spread currently stands at 1.98%. However, if the deal closing period is reduced to three months, this return would move closer to 5%. Calculating a floor price for the target is tricky as rumors of a takeover for Navistar have persisted for some time and exhibited a volatile effect on the share price. In fact, in June of last year it was reported Traton took the deal of the table before returning with improved deal terms, although some market participants remained convinced a deal would still eventually take place.
Traton CEO Andreas Renschler says Traton, the Volkswagen (OTCPK:VWAGY) unit that makes trucks and buses, is “very satisfied” with owning 16.6% of NAV’s stock and controlling two board seats.
In light of the timeframe involved in this deal, the risk in terms of financial loss becomes increasingly difficult to calculate. Some market observers have suggested a floor price in the $20’s but stress the difficulty in making such an estimate. Due to the run-up in the broader market however, we believe this value to be somewhat conservative.
With the possibility of a superior proposal unlikely, it appears $44.50 is what investors will receive. With such a small spread and potentially over 7 months until completion, we feel this deal is reasonably priced. Cash merger arbitrage spreads have become squeezed in recent weeks. This has caused the market to chase smaller returns as a way to employing excess capital. From a bond investors point of view and with such a high deal closing probability this return may seem attractive. However, in terms of merger arbitrage, more enticing opportunities may present themselves, or indeed a more attractive entry point may occur in this stock before the deal is finally consummated.
Fitbit (FIT)
Fitbit was perhaps somewhat surprisingly amongst the best performers this week coming in at second place.
in the T20 index during the past week. Despite there not being any significant deal news the stock managed to move ahead almost keeping pace with the broader market. As we have already noted, cash merger arbitrage spreads move in a slightly more correlated fashion with the market than stock deals. But this can only happen when there is room within the spread to narrow. This was the case with Fitbit.
We continue to expect the ongoing EU investigation which is scheduled to conclude by January 8, 2021 to will be the underlying main influence on the spread going forward. Fitbit recently 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.
By the close on Friday the stock finished higher by $0.11, at $7.15, a rise of 1.56%. This still leaves the simple spread at 2.80%. We will continue to hold but no longer consider the spread to be as an attractive proposition as previous although on an annualized basis does remain viable.
SINA Corporation (SINA)
Sina was also a strong performer this week. Despite no new deal news to report the stock became the third best performer in the index last week. The recent increase in the offer price from $41 per share from New Wave in a “going private” transaction, to $43.30 has given the stock some additional breathing room in which to advance. Traders continued to buy into the deal speculating that a potential thawing with relations with China as Joe Biden ascends to the Oval office may speed up the clearing of regulatory hurdles. By the end of the week the stock finished up $0.37 at $43.27, a rise of 0.86%. This leaves the simple spread at 0.07%.
PNM Resources (PNM)
The worst performer in the index this week…..YET AGAIN… was the seldom covered PNM Resources (seldom, other than the last time we recently discussed this stock). By the close on Friday had finished lower by $0.25, at $49.00, a fall of 0.51%. This leaves the simple spread at 2.65%. However, a reasonable dividend yield increases this merger spread to an attractive level although the lengthy expected completion date has caused some to take some money off the table.
Despite there being no new deal news announced for the stock (again) the performance bucked the trend of the broader market and headed lower. Similar to our previous coverage, there was also a flurry of shareholder lawsuits filed regarding the acquisition.
We do not currently hold a position but postulate the spread to be an attractive investment opportunity in the future. Dividend investors may find this an attractive play but for the time being, the extended completion timeline and the number of regulatory hurdles that need to be cleared makes us in no rush to open a position.
