This is the weekly Merger Arbitrage Performance Review – March 7, 2021. This report focusses on the performance of the SOGO, CHNG & MGLN merger arbitrage spreads during the period 1st March – 5th March. These stocks were selected from the weekly largest top 20 investable US cash based merger spreads that was available as at 28th 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 – March 7, 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 - March 7, 2021
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.11% | SPY | 0.86% |
| Index Dispersion | 0.68% | VIX | 11.77% |
| Winners | 11 | MNA | 0.89% |
| Losers | 9 | ||
Market Performance Review
Equity markets retreated strongly during the week as fears over inflation and the direction of interest rates mounted. However, by the end of the week, especially due to the strong performance on Friday, the broader market had recovered and entered positive territory. Employment data has almost taken a backseat as the interest rates story continues to dominate. At one point during the week, the broader market had turned negative for the year prompting claims of a major sell off and a new phase for the stock market. Despite this, rates are still historically low and the emergence from the global pandemic lockdown will most likely provide fresh opportunities for some time to come.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund had moved higher by 0.86%. Accordingly, the VIX responded by moving lower and by the end of the week was down 11.77%. The IQ Merger Arbitrage ETF (MNA) also had a negative week. Losses in Xilinx (XLNX) and Inphi (IPHI) were at the forefront of the decline as their respective acquirer stocks declined in line with the tech sector. CIT Group however continued to improve on last week’s strong performance and moved ahead by an additional 0.27%. By the close on Friday, the ETF was showing a loss of 0.89%. The fund now resides in negative territory for the calendar year showing a loss of 2.82%
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 Change Healthcare (CHNG), Perspecta (PRSP) & PNM Resources (PNM). A bright spot was the recently announced deal to acquire Forterra (FRTA), which posted an impressive gain.
There were no deal closures during the week although Waddell & Reed Financial (WDR) & Urovant Sciences (UROV) were removed as their spreads were no longer amongst the largest top 20 merger arbitrage spreads. More spread details about this week’s index list can be found on our Spread Tracker page.
The T20 index had a volatile week displaying an impressive return at one point but eventually closed down for the period by 0.11%. The index was comprised of a complete complement of 20 merger arbitrage cash deals. Despite the negative performance, winners outpaced by the losers by a margin of 11 to 9 with 0 non-movers. The standard deviation of the individual index returns was 0.68%. This figure is significantly below both the long term and medium term averages.
Merger Arbitrage Performance Review - March 7, 2021
Forterra (FRTA)
A debut appearance from Forterra (FRTA) sees the stock top our leaderboard this week. The firm is currently the subject of a $24 per share all cash offer from Quikrete Holdings. The deal which was announced on February 22nd has an expected closing date of 4Q, 2021.
The press release (8-K filing with the SEC) that accompanied the announcement of the acquisition stated
An affiliate of Lone Star Funds (“Lone Star”), a global private equity firm, acquired Forterra in 2015 and has maintained a majority ownership since the Company’s initial public offering in 2016. Following execution of the merger agreement, Lone Star, which owns approximately 53% of the Company’s outstanding shares of common stock, approved the transaction by written consent. No further action by Forterra’s shareholders is needed or will be solicited in connection with the merger.
At such an early stage of the deal process HSR clearance is still required. However, we see no significant obstacles (other than customary closing conditions) as to why this deal will not consummate as expected.
We therefore consider this to be a particularly safe spread in comparison to other currently available opportunities and naturally there is a only a smaller spread on offer. In light of this it is unlikely we shall initiate a position in the near future, although if we have funds to spare and earlier closing looks likely, the annualized spread could prove to be attractive from a risk/reward perspective. By the close on Friday, the stock had finished higher by $0.18, at $23.45, a rise of 0.77%. This leaves the simple spread at exactly 2.35%.
Change Healthcare (CHNG)
In command of the laggards this week was Change Healthcare (CHNG) which is beginning to make itself a regular visitor to this column. This is an all cash offer from UnitedHealth (UNH) for $25.75 per share. The deal is expected to close in 2H, 2021.
The stock had declined steadily throughout the week and it was only during Friday’s trading session that some seeds of reliance had begun to bear fruit. The stock had previously suffered due to the withdrawal of the HSR notification to allow the authorities more time to complete their analysis. The refiling is not however to be expected (at this stage) to extend the closing timeline with the deal expected to close in the second half of the year.
The key announcement made during the week was the announcement of the date of the extraordinary general meeting.
You are cordially invited to attend a special meeting of the stockholders of Change Healthcare Inc. (“Change”) to be held at 3:30 p.m., Eastern Time on April 13, 2021
We continue to hold our position in this stock. As mentioned previously, should the spread subsequently narrow, we will look to bank some profits and take our money off the table. By the end of the week, the stock finished down $0.47 at $22.40, a fall of 2.06% against an offer price of $25.75. This leaves the simple spread at an attractive 14.96% and is the highest in our merger arbitrage index.
Perspecta (PRSP)
A previous star performer, this week Perspecta finds itself in the laggards section. 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.
We consider this to be a particularly safe spread especially in light of Veritas currently holding 14.5% of Perspecta’s tradable stock. As the spread has recently widened we may look to initiate a small position in the near future but are in no great rush to do so. By the close on Friday, the stock had finished lower by $0.36, at $28.84, a fall of 1.23%. This leaves the simple spread at 2.26%.
PNM Resources (PNM)
News from PNM Resources this week casts doubt on the accuracy of the deal closing timeline. We commented previously on how the regulatory approvals often cause deals of this type to have a lengthy closing period. This caused Citi to downgrade the utility to neutral due to the uncertainties/risks with the Texas outage and its impact on Avangrid (AGR) receiving regulatory approval.
In addition to this, the New Mexico Public Regulation Commission ruled that PNM’s application to exit Four Corners was insufficient and that the utility needs to file an amended application by March 15. An Advocacy group in Santa Fe told CTFN that the group filed a motion asking the regulator for PNM’s ownership transfer in Four Corners to be rejected since PNM shouldn’t have invested in the power plant originally.
On bright spot during a tough week was the announcement by the Board of Directors which declared the regular quarterly dividend of $0.3275 per share. The dividend is payable May 14, 2021 to shareholders of record at the close of business April 30, 2021. Dividend investors may find this an attractive play.
Despite these drawbacks we took a position in this stock during the week averaging in the low $47’s. We stand ready however to exit this position quickly should the stock rise in the immediate future so as not to tie up our capital in a deal with a long closing timeline.
By the close on Friday had finished lower by $0.59, at $47.42, a fall of 1.23%. This leaves the simple spread at 8.32%.
