This is the weekly analysis of Merger Arbitrage Spread Performance November 10, 2019. This reports covers the top 20 investable US cash based merger arbitrage spreads for the week 4th – 8st November. The first section of this report discusses the biggest winners & losers from the T20 portfolio. Then we detail the performance of the overall portfolio. To conclude, we compare this performance with the broader market and the IQ Merger Arbitrage Exchange Traded Fund – MNA. The information contained in this weekly analysis & review assists traders in their merger arbitrage investment decision making.
In this report, Merger Arbitrage Limited reviews a selection of merger and acquisition deals from the T20 Portfolio. A list of pending cash merger arbitrage spreads available as at 3rd November. 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 Portfolio. Click this link for the spread performance analysis from the previous week.
Merger Arbitrage Spread Performance November 10, 2019
Spark Therapeutics (ONCE)
Another some good performance from Spark Therapeutics this week. Although the CMA decision still hangs in the balance, FTC staff have issued their recommendation. However, although we await official confirmation of this recommendation, the market appears to have accepted its inevitability. ONCE closed for the week up a further $1.68 at $111.58. This gives a spread of 2.62%.
We reprint the timetable for the CMA investigation as shown last week.
| Phase 1 Date | Action |
| 16 December 2019 | Deadline for phase 1 decision* |
| 21 October 2019 | Launch of merger inquiry |
| 25 September – 11 October 2019 | Invitation to comment |
| 6 June 2019 | Initial enforcement order |
* This date is the current statutory deadline by when the decision will be announced.
Following the lack of announcement by the FTC and the ongoing investigation by the CMA, at these levels will look to exit our position in the very near future.
Mellanox (MLNX)
Mellanox makes a welcome return to the best performers. Buoyed by the positive news coming out of the trade negotiations the stock advanced $1.30 or 1.14%. The spread is now 8.64%. We do not expect any news during the ongoing review period of the SAMR. This is set to conclude in February next year. However, with the global trade situation beginning to settle this could prove to be an attractive opportunity for new investors. We already have a position, and with the additional comfort of a positive earnings release supporting the floor price, we are happy to maintain it.
Changyou.com (CYOU)
Changyou.com was another big winner as a result of earnings last week. The stock rose 1.04% to close at $9.73. This leaves the simple spread at 2.77%. This rise marks a pleasant recovery for this spread. The latest earnings beat on both EPS and revenue, which, like MLNX above, supports the floor price and adds additional cushion should the deal not be successful. Solid earnings are also reassuring and (almost) the possibility of poor performance being used to invoke a MAC clause. However, we currently do not have a position but may look to initiate one in the coming week.
Red Robin Gourmet Burgers (RRGB)
Red Robin Gourmet Burgers was the largest decliner this week following a set of less than satisfactory results. Even though GAAP EPS was lower than expected and turnover decreased slightly the stock was pummeled from the moment of the announcement on Tuesday after the market close until the end of the week. RRGB finished down 14.46% at $26.68, a drop of $4.51.
What however is perhaps more significant is the lack of news regarding the takeover approach from Vintage. There has been no mention of the proposed takeover in any official filings made by the target and Vintage itself is yet to make an announcement. We believe this has caused the stock to deteriorate further than would have otherwise been expected.
RRGB has always been among the riskier merger arbitrage plays as the takeover is considered hostile. Red Robin management have refused to engage in dialogue and maintain the offer undervalues the company. This type of “just say no” defense can be surprisingly effective. However, in addition to this is the current performance of the target. Many merger arbitrageurs avoid poorly performing targets for two reasons. Firstly, a company specific risk where an underperformer continues in this vein of negative growth thus reducing the value of the company, or exposing it to issues that were not previously known such as accounting irregularities. Secondly, the macro environment where the company operates in a business segment that may be struggling as a whole. These two issues significantly increase the likelihood that the acquirer will walk away. In this instance, the possibility is increased further as there is no definite agreement between Vintage and red robin that Vintage needs to abide by.
Obviously, we, along with the market have been aware of these risks and they have clearly been represented in the volatility of the spread. Indeed, we previously suggested additional caution should be taken over the earnings announcement period. To take advantage of the spread volatility we implemented an active arbitrage strategy to trade in and out of our position as the market moves.
Following this drop the stock is now trading at a price similar to where the stock was prior to the announcement of the proposed takeover. After accounting for the continued decline in company performance we believe the market (via the stock price) is effectively calculating the probability of this deal being consummated as being somewhere between “no chance” and “very unlikely“. However, we are yet to hear from Vintage. We previously calculated a rough entry price in the low $30’s for Vintage although we very much assume they have adjusted their position since the initial investment.
The speculative stakes have been raised high above the comfort level of most merger arbs which may also have forced the price lower. The immediate future of this stock price relies very heavily of the decision to be made (announced) by Vintage. Does the declining performance make the BoD more inclined to engage in dialogue with Vintage? If not, do they walk away and sell, if they have not done so already, or undertake a lengthy and expensive proxy battle. Either way, we expect more volatility to come in this stock.
Pacific Biosciences of California (PACB)
PACB once again finds itself in the worst performers following last week’s partial recovery. The stock price finished the week at $4.69 down 4.29%. This leaves the spread at 70.58%. As expected, there was no deal news announced this week. Traders are braced for the CMA decision following their Phase II investigation. This has a statutory deadline of December 11 2019. At these levels, we have maintained our position and will do so for the time being.
Merger Arbitrage Portfolio Performance
Winners outpaced the losers by 11 to 5 this week with 1 non-movers. The portfolio consisted of 17 stock and 3 cash positions. The portfolio showed a disastrous performance for the week finishing down by 0.75%. This negative performance was primarily attributable to the decline in RRGB. Readers can stay abreast of developments in these deals by following our customized T20 Portfolio news feed. This shows the latest mergers and acquisitions news updates focusing exclusively on the pending cash mergers we consider eligible for investment. We have also introduced dedicated news pages focusing on specific deals such as CISN, FIT, GWR, ONCE, PEGI, RARX, TIF, WMGI, & ZAYO along with background deal information. Return standard deviation for the past week was 3.71%. This figure is high above both the short-term and long-term averages due to the reason mentioned above.
MNA SPY VIX Returns Table 20191108
*We have not included MRGR ETF for liquidity reasons. Click the table to read our Merger Arbitrage ETF Review and see a discussion of how liquidity and other factors affect the performance of these products.
Market Performance
The IQ Merger Arbitrage ETF, MNA, despite turning negative in the middle of the week, rose significantly late on Wednesday and continued for the rest of the week to produce a positive return of 0.15%. This rise fell significantly short of the rise in the broader market. However, the market did undergo an identical rise on Wednesday following the announcement of a possible breakthrough in the U.S. – China trade negotiations. The SPDR S&P 500 ETF, SPY, finished up 0.90%. The VIX index unsurprisingly moved lower for the week. It eventually settled on a decrease of 1.87%. Positive sentiment continues to buoy the markets and volatility remains subdued despite the obvious risks to global trade. However, earnings season continues to deliver robust results. We have listed those merger arb stocks who are part of the T20 and are scheduled to report on our Spread tracker page.
And finally...
The most recent list of the largest spreads is already available. Our merger arbitrage spread calculator is also available for FREE download. This can be used to value the spread of any stock-for-stock deals you may be interested in.
