This is the weekly Merger Arbitrage Performance Review – November 29, 2020. This report focusses on FIT, RESI, SOGO & UROV arbitrage spreads during the period 23rd November – 27th 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 22nd 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 29, 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 RSAIF, HDS, DNKN, IPHI–MRVL, AMD–XLNX, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - November 29, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 1.32% | SPY | 2.35% |
| Index Dispersion | 5.15% | VIX | 12.07% |
| Winners | 13 | MNA | 0.03% |
| Losers | 5 | ||
Market Performance Review
In this holiday shortened week (happy Thanksgiving by the way), the broader market (as measured by the DOW) set a new milestone as the index surpassed the 30,000 mark for the first time. The S&P 500 which also posted fresh all-time highs was boosted by the progress made in the development of various vaccines to help protect the populace against Covid-19. Disappointing employment numbers and the continuing rise in domestic infections no longer appears to trouble the markets.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund had moved higher by 2.34%. Accordingly, the VIX responded with a decrease and by Friday was lower by 12.07%. The IQ Merger Arbitrage ETF (MNA) on the other hand had an indifferent week. The ETF would have been expected to perform well following positive movements from resource stocks such as Concho Resources (CXO) and WPX Energy (WPX). However, these advances were tempered by the gains made in the ETF’s use to hedge these takeover targets, namely Energy Select Sector SPDR Fund (XLE) & SPDR S&P Oil & Gas Exploration & Production ETF (XOP). By the close on Friday, the IQ Merger Arbitrage ETF was fractionally better off by 0.03%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index produced a positive performance (yet again) extending the winning run to a record 9 consecutive weeks! The Index was able to post a substantial increase unlike the MNA, due to the inclusion of Frontyard Residential (RESI). The index benefited from the rise in RESI due to a higher buyout offer. The index does not to speculate on the possibility of a superior proposal or higher offer, but at the time of inclusion the spread was at a discount and therefore a valid inclusion in the index.
Although no deals closed during the week, there were some removals as a trio of stocks traded at or above their offer prices. The Index, acting in accordance with the “prudent investor” removes these stocks to bank profits and remove the speculative nature of gambling on higher offers. More details about this week’s index list can be found on our Spread Tracker page.
The T20 index closed up for the week by 1.32% with RESI providing almost all of that 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 5 with 0 non-movers. The standard deviation of the individual index returns was 5.15%. This figure is significantly above both the short term average and the medium term average figure. The reason, as mentioned before was the outsized movement recoded in RESI.
Merger Arbitrage Performance Review - November 29, 2020
Front Yard Residential (RESI)
Front Yard Residential was the standout performer amongst cash merger arbitrage stocks last week following a revised offer on Monday November 23. The company had originally entered into definitive merger agreement with a partnership led by Pretium which included funds managed by the Real Estate Equity and Alternative Credit strategies of Ares Management Corporation (NYSE: ARES) to acquire RESI $13.50 per share. Immediately following the announcement, which was made on October 19th of this year, the stock traded at an intra-day high of $13.69 but subsequently returned to just below the offer price where it remained until last Monday.
During this range bound trading period, the merger arbitrage spread was offering an approximate 1% simple spread return. With an expected closing during Q1, 2021 the annualized spread was between 3-4%. This is perhaps on the lower side of existing cash spreads at the time but certainly not extraordinarily low. It is fair to assume a higher offer or superior proposal was not widely expected.
On Monday morning however, Rochelle R. Dobbs, Front Yard’s Chair of the Board was quoted as saying
After receiving a binding proposal reflecting a higher purchase price for Front Yard, Front Yard advised the Pretium Partnership of the proposal as required by the terms of the merger agreement, which led to the Pretium Partnership increasing the price of our transaction with them. Following these discussions, our Board approved the amendment to the merger agreement.
This amended agreement resulted in an increase in the offer price to $16.25 per share. Again, the transaction is expected to close in the first quarter of 2021. The stock price responded accordingly and rose immediately. However, this time the price has stubbornly remained above the revised offer price since the announcement in a $16.25-$16.45 range.
RESI has of course previously attracted the attention of other suitors. Back in February, the stock was the subject of a $12.50 offer from Amherst, before the acquirer backed out by paying the termination fee. This latest offer then might not have come of much a surprise given that the firm has historically traded at a discount to NAV despite embarking on a period of increased profitability and improving an business environment.
The question now becomes “Will there be an even higher offer?“
ARES appear to be committed to making this deal happen. Don Mullen, Pretium’s Chairman and Chief Executive Officer is quoted as saying
We believe in this Company and the Front Yard team and remain committed to completing this transaction
This may be enough to deter rival bidders but we would not expect a statement from Pretium’s CEO to say anything less. The stock is now almost two thirds higher than the pre offer trading price in October. Even factoring in subsequent market and economic movements, the stock is comfortably 50%+ above the floor price.
A quick P/E value comparison amongst industry peers would suggest a higher bid is unlikely. RESI management have stated the agreement is the result of a well run sales process which indicates that they themselves are not expecting further offers. However, with the stock currently trading at a premium to the offer price, it does suggest market practitioners are speculating on further developments. Although, the lack of speculative activity following the original offer suggests the market might not always be indicative of future corporate actions. We conclude however it would be unlikely this stock receives any further takeover interest.
By the close on Friday the stock finished higher for the week by $2.96, at $16.34, a rise of 21.94%. This leaves the simple spread at negative 0.55%. We do not have a position in this stock and are not comfortable buying above the current offer price. Should this deal evolve further however we stand ready to modify our opinion.
Fitbit (FIT)
Fitbit was perhaps somewhat surprisingly amongst the best performers this week coming in at second place. A report from CTFN on Tuesday claimed the Justice Dept. is not expected to rule on Google’s (GOOG, GOOGL ) acquisition of Fitbit (FIT) until after the EU has made its decision regarding the takeover.
Currently, the EC is scheduled to conclude up its recently extended investigation by January 8, 2021 having launched a full investigation of the deal in August. The investigation is focused on Google’s potential use of health data in its targeted advertising.
In addition to this, on Friday, in a letter to the EU competition chief, Margrethe Vestager of Amnesty International wrote
The commission must ensure that the merger does not proceed unless the two business enterprises (GOOG & FIT) can demonstrate that they have taken adequate account of the human rights risks and implemented strong and meaningful safeguards that prevent and mitigate these risks in the future.
Investors did not appear to be troubled by the involvement of Amnesty as the stock traded down just 1 cent on Friday. By the close on Friday the stock finished higher for the entire week by $0.04, at $7.18, a rise of 0.56%. This leaves the simple spread at 2.37%. We will continue to hold but no longer consider the spread to be as an attractive proposition as previously. However, using a forecast closing date of the end of January next year, the return on an annualized basis, at almost 15% does remain viable.
Urovant Sciences (UROV)
The curse of the T20 Index strikes once more as Urovant Sciences (UROV), a top performer last week, subsequently finds itself atop the laggards this week. The only news during the week was from an 8-K filing with the SEC in which the company announced
Topline Data from Phase 2a Study of Vibegron for the Treatment of Irritable Bowel Syndrome (IBS) Pain Did Not Meet Primary Endpoint
the company went on to say
We look forward to advancing our Phase 3 program for vibegron in men with overactive bladder and benign prostatic hyperplasia (BPH)
By the end of the week, the stock had finished down $0.07 at $16.07, a fall of 0.43%. This leaves the simple spread at 1.12%. With still such a small return on offer, we are reluctant to open a positon in this stock for the time being.
SOGOU (SOGO)
Sogou by contrast, which was the second worst performer in the index last week, posts an identical performance this week coming in at second place on the laggards board behind UROV. By the close on Friday the stock had finished lower again by another $0.03, at $8.86, a fall of 0.34%. This leaves the simple spread at 1.58%. Without there being no new deal news announced for the stock, the performance of this spread naturally remains range bound as it trades close to the $9.00 offer price from Tencent (TCHEY).
We do not currently hold a position but may consider the spread to be an attractive investment opportunity due to the expected closing date of Q4, 2020. Should this deal close as expected, traders may be able to realize an annualized return in excess of 20%.
