This is the weekly Merger Arbitrage Performance Review – February 28, 2021. This report focusses on the performance of the SOGO, CHNG & MGLN merger arbitrage spreads during the period 22nd February – 26th February. These stocks were selected from the weekly largest top 20 investable US cash based merger spreads that was available as at 21st February, immediately prior to the analysis period. Investors and traders can follow the latest Top 20 (T20) list each week compiled by Merger Arbitrage Limited to review this week’s largest pending cash merger arbitrage spreads. Regular followers will already be familiar with our rules for inclusion in 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 – February 28, 2021 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 GLUU, LITE–COHR, CHNG, AJRD & TLRY–APHA.
Table of Returns
Merger Arbitrage Performance Review - February 28, 2021
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.55% | SPY | 2.48% |
| Index Dispersion | 0.98% | VIX | 26.76% |
| Winners | 6 | MNA | 1.33% |
| Losers | 13 | ||
Market Performance Review
Equity markets retreated strongly this week as fears over the recent rise in interest rates starts to trouble the markets. Although short term rates remain stable the increase in the 10 year treasuries suggest action may soon be required to stop the equity markets from overheating. Meanwhile on Capitol hill, the latest stimulus package is finally finalized! Right on cue, the markets act according by reciting the age old mantra of buy the rumor, sell the news. Call it the price of normality.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund had moved lower by 2.48%. Accordingly, the VIX responded by moving higher and by the end of the week was up 26.76%. The IQ Merger Arbitrage ETF (MNA) also had a negative week. Losses in Xilinx (XLNX) and Slack Technologies (WORK) were at the forefront of the decline. CIT Group however was able to deliver some positive performance. By the close on Friday, the ETF was showing a loss of 1.33%. The fund now resides in negative territory for the calendar year showing a loss of 0.32%
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index also suffered from negative performance during the week. The loss was in large part due to the sizeable decline in Sportsman’s Warehouse (SPWH) along with additional falls in Change Healthcare (CHNG), Aerojet Rocketdyne (AJRD) & Sogou (SOGO). This overall loss was partially offset by a reasonable gain from and Perspecta (PRSP).
There were no deal closures during the week although Oxford Immunotec (OXFD) & Acacia Communications (ACIA) were removed as their spreads narrowed considerably. More spread details about this week’s index list can be found on our Spread Tracker page.
The T20 index declined steadily throughout the week and closed down for the period by 0.55%. The index was comprised of a complete complement of 20 merger arbitrage cash deals. As expected with this performance, winners were outpaced by the losers by a margin of 6 to 13 with 1 non-mover. The standard deviation of the individual index returns was 0.98%. This figure is comfortably below both the long term average and slightly below medium term average.
Merger Arbitrage Performance Review - February 28, 2021
Perspecta (PRSP)
What a time to make a debut appearance in our analysis column. As the only significant gainer for the Perspecta is a recently announced deal by way of an all cash offer of $29.35 by Veritas Capital. The deal is expected to close in the first half of the year.
Perspecta was able to buck the trend of other all cash merger stocks by announcing that it has received an award to continue supporting the Defense Manpower Data Center (DMDC) with a mission-critical program for contractor management. The award spans five years, including four option years, with a ceiling value of $38 million.
We consider this to be a particularly safe spread in comparison to other currently available opportunities although with such a small margin on offer, it is unlikely we shall initiate a position in the near future. By the close on Friday, the stock had finished higher by $0.19, at $29.20, a rise of 0.65%. This leaves the simple spread at exactly 1.00%.
Sportsman’s Warehouse (SPWH)
Top decliner and second appearance in our analysis column is Sportsman’s Warehouse. Without any new filings made with the SEC during the week and no other specific deal updates, SPWH, like most in our analysis this week got caught up with the general market decline. The stock is currently the subject of an $18 a share bid from Great American Outdoors Group with the deal expected to close in 2H, 2021. With such an extended closing timeline we had previously stated “we are not in a rush to enter a position” in this stock.
However, SPWH appears to have suffered more than most and with this decline, and no other changes to the DCP we may look to take a position during the week. By the close on Friday, the stock had finished lower by $0.57, at $16.94, a fall of 3.26%. This leaves the simple spread at 6.26%.
Change Healthcare (CHNG)
Second in command of the laggards this week was Change Healthcare, also making its second appearance in our weekly column. This is an all cash offer from UnitedHealth (UNH) for $25.75 per share. The deal is expected to close in 2H, 2021.
This is another instance of a cash merger arbitrage opportunity being caught up in the general market decline. However, the recent withdrawal of the HSR notification to allow the authorities more time to complete their analysis continues to weight on the stock. The refiling would not be expected (at this stage) to extend the closing timeline with the deal expected to close in the second half of the year.
In light of this, we have initiated a position in this stock. Should the spread subsequently narrow significantly however, we will look to bank some profits and take our money off the table. By the end of the week, the stock finished down $0.52 at $22.87, a fall of 2.22% against an offer price of $25.75. This leaves the simple spread at an attractive 12.59% and is the highest in our merger arbitrage index.
Aerojet Rocketdyne (AJRD)
This week’s third biggest loser was Aerojet Rocketdyne. No major deal news was announced during the week but on the previous Friday Aerojet Rocketdyne had said it received a second request from the Federal Trade Commission for a regulatory review of its proposed takeover by Lockheed Martin (LMT).
As a general observation, it appears stocks which have recently experienced a minor hiccup in the closing process have been punished during the sell-off during the week more than deal which are considered safer. Thus providing opportunities for the astute investor.
Following a previous drop, we stated we had initiated a small position in this stock which is no longer showing a profit. We are however happy to maintain the position for the time being. By the end of the week, the stock finished lower by $1.13 at $51.27, a fall of 2.16% against an offer price of $51. This deal also includes a special dividend payment of $5.00. This leaves the simple spread at a healthy 10.22% due to the long deal closing timeline, (2H, 2021), the second highest in the index.
Sogou (SOGO)
Sogou, which was also a significant decliner during the week, posted a unhealthy fall during he week. This spread continues to be one of the most volatile cash merger arbitrage spreads of recent months providing a number of opportunities for multiple entries and exits. Spreads such as this, with a lower DCP, are also more susceptible to the influences of the broader market movements thus increasing spread volatility.
We had previously spoke of the risks of investing in this spread and stated
There are greater risks involved in trading this spread and we urge traders to consider taking (at least) some profits should the opportunity arise. Especially if there has been little or no news.
In light of this, we continue to actively trade this spread as part of our Active Arbitrage strategy. This is the repeated buying and selling of the same stock to take advantage of the spread volatility. We maintain a “core” position which we will hold until deal resolution, but in the meantime we will add to (or sell) stock as the price fluctuates.
By the close on Friday, the stock had finished lower by $0.11, at $8.26, a fall of 1.31%. This leaves the simple spread at 8.96%, and is now only the third largest in the index.
