Tuesday, October 28, 2008 0 comments ++[ CLICK TO COMMENT ]++

Risk Arbitrage Thoughts: BCE, Huntsman, Q9 Networks

Thoughts on some risk arbitrage items...

BCE Saga

Well, it looks like there is another lawsuit against the BCE buyout. This time, some shareholders are suing BCE because it cancelled the dividend. Sounds like a frivolous suit to me. Maybe it's about time that some of these investors realized that companies are not obligated to pay dividends.

The Globe & Mail also has some notes on various, conflicting, views on the BCE takeover from analysts. On top of the credit crisis, the sheer size of the takeover makes financing a legitimate threat to the deal.

Huntsman Buyout

One of the big M&A deals that was embroiled in a legal battle was the Huntsman buyout by Hexion Specialty Chemicals. It was moving forward after the court ruled in favour of Huntsman. Well, it looks like the banks are now refusing to finance the deal. It will go to the courts and it remains to be seen what comes of this. Again, like most of the recent spate of M&A legal battles, precedents and long-term rulings are being made by the courts.

If you are ever engaged in risk arbitrage, it's important to consider failures and decisions from the courts.

Q9 Networks Buyout

Andrew Willis of The Globe & Mail speculates that the wide arbitrage spreads are not necessarily indicative of deal failure. He refers to the Q9 Networks buyout (a Canadian deal) where the spread was 24% on the day the deal completed. He alludes to the fact that a lot of hedge funds are exiting the risk arbitrage market.

I was wondering the same thing a while back when I asked out aloud whether the BCE spread is due to forced exit of arbitrage funds or whether it is actually indicative of the actual outcome. I didn't know the answer at that time but now I'm of the opinion that the spreads have little to do with the actual risk. This thinking is what led me to take a position in Puget Energy (I wasn't confident with the wide spread before.) None of this is to say that these deals won't fall apart, but the risk-return is favourable. Remember, in a cash-starved world, those with cash get to call the shots. Risk arbitrage funds generally relied on leverage to boost their returns and would have faced huge margin calls lately given that nearly all assets have collapsed 30% or more--including many that were considered "safe" and "attractive" a few months ago. If you are sitting on the sidelines with cash, you can enter a risk arbitrage position with practically no competition from these funds.

Risk arbitrage was very lucrative a few years ago (I wasn't really participating much back then.) But it turned into a disaster over the last year. Now, I feel that it is back to being attractive. As always, ideal deals are the strategic buyouts rather than the financial buyouts.

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