ABN, TRB, BCE Merger "Arbitrage" Update

As I have remarked before, merger "arbitrage" looks like the most attractive strategy to a newbie like me right now (I put "arbitrage" in quotes because this is a speculation, as opposed to an arbitrage, since I don't hedge by shorting (not possible in some of these cases anyway)). I find the mergers attractive because they are not dependent on the broad market, which is heavily influenced by economic growth, profitability, sentiment, etc (there is a lot of uncertainty with these numbers right now). Furthermore, the merger discount is very large right now due to credit issues and, supposedly, some merger-arbitrage hedge funds leaving the market (due to liquidity problems in other strategies within their family of hedge funds). You don't see such discounts during a normal scenario (i.e. during a typical bull market or bear market).

Of the announced mergers, the three I found attractive were ABN-Amro (ABN), BCE (BCE), and Tribune (TRB). You can read my prior write-ups here: ABN post; BCE article; TRB article.

You are guaranteed a positive return if the merger closes. So your risk is whether the merger will close. The risk of a failed merger can be large but I can handle it. In some cases, holding the failed merger company is quite risky (eg. Tribune will be a heavily leveraged newspaper company in a declining industry) whereas I can see myself holding some companies (eg. even if the takeout fails, BCE is a somewhat attractive slow-growth, dividend yielding, safe, company).

I have decided to take a position in one of the three now. Timing is very difficult, and also some deals like TRB may close very quickly (if FCC gives the OK, which I think it will). Here is my evaluation of the deal as of today.

NOTES:
  • BCE deal is in Canadian dollars for Canadian investors. BCE is also listed on NYSE and the American takeover price and conditions will be slightly different. The returns should be almost identical but there may be US$/C$ exchange rate risk for American investors.
  • ABN-Amro deal is for NYSE ADS holders. The European holders of the stock on the local exchanges have different prices and conditions. The returns should be similar but there could be slight differences due to exchange rate differences, non-identical prices between local stock prices of ABN-Amro in Amsterdam and the ADS stock price on NYSE.
  • All potential returns exclude dividends, transaction costs, and other minor items.
  • All prices as of 1:29 PM, Thursday, August 30, 2007


BCE Takeout

BCE takeover price: C$42.75
Shareholder vote: September 21, 2007
Closing Date: Q1 2008

Current price: C$ 40.03

Simple Potential Return (excluding transaction costs, dividends, etc): 6.79%


ABN-Amro Merger

Two Deals: One by RFS consortium; another by Barclays.

RFS: EUR 35.60 + 0.296 newly issued ordinary shares of RBS
Closing date of RFS offer: October 5, 2007

Barclays: EUR 13.151 + 0.5325 Barclays ADSs
Closing date of Barclays offer: October 4, 2007

Vote by ABN-Amro shareholders: September 20, 2007

Euro/US$ exchange rate today: 1.3694
Sterling/US$ exchange rate today: 2.0158
Stock price - RBS on LSE: 568 (pence)
Stock price - Barclays on NYSE: 48 (US$)

Stock price - ABN on NYSE: 46.71 (US$)


Value of RFS deal today = 35.60*1.3694 + 0.296*5.68*2.0158 = US$ 52.1398
Value of BCS deal today = 13.151*1.3694 + 0.5325*48 = US$ 43.5690

RFS simple return (excluding transaction costs, dividends, etc) = 11.6%
BCS simple return (excluding transaction costs, dividends, etc) = -6.7%


Tribune Deal

TRB takeover price: US$34
Shareholder vote: August 21, 2007
Closing Date: 4th quarter of 2007 (let's assume December 31st, 2007; note that it can be delayed)

Current price: $27.12

Simple Potential Return (excluding transaction costs, dividends, etc): 25.37%

Comments

  1. AnonymousFebruary 10, 2008 at 2:56 PM

    You can find information on past mergers at www.madmergers.com!

    ReplyDelete

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