Thursday, March 19, 2009 0 comments

M&A deals to ponder

As I have repeated many times, one of the best ways to earn returns in a bear market is through risk arbitrage (you can also add liquidations, tender offers, and so forth, but it's hard to get information for some of them.) Risk arbitrage is largely uncorrelated with the market and you will earn returns based on whether the deals succeed or fail, rather than what happens to the economy or whether a company is increasing profits or whatever. The downside to risk arbitrage (or other special situation investing) in this market is that you may miss the upside of buying cheap stocks. If a bull market starts tomorrow, or if you manage to locate an undervalued stock that the market recognizes, you will earn far more by having normal exposure to companies.

There are a bunch of M&A deals I've been tracking.

I ruled out deals like Wyeth (WYE) because (i) the returns were low when I looked at it a few months ago, especially given the far-off closing date, and (ii) it is not a 100% cash deal (I don't know how to short and I suspect it'll be expensive for me.)

I also looked deeply at Westaff (WSTF) but decided against it due to high risk. This is a company that will basically go bankrupt if the deal doesn't close. If it were a large company then it may be plausible to assume that management will try to close the deal but it's difficult to say with small no-name companies.

Another deal that I have tracked and might invest in is the Nova Chemicals buyout (NCX; TSE: NCX). Nova is a Canadian chemicals giant that was almost bankrupt and was saved by some Abu Dhabi investment fund. The deal requires Canadian regulatory approval. Nova may go bankrupt if the deal doesn't close so this is a high risk one. Approximate return right now is around 5.6%, too low for me.

The Nitromed (NTMD) deal also looks interesting. This is a penny stock that is being bought out based on some formula. Read the SEC filing to get the full details because the price can be slightly higher or lower than $0.80 based on cash on the books. As for right now, this deal's return is too low (~6.8%) for me to consider. It is worth considering this deal closer to consummation.

The most attractive one, although the risk is hard to figure out, is the Verenex (TSX: VNX) buyout. Verenex is a Canadian junior oil&gas company operating in Libya. China National Petroleum Corporation offered a friendly deal for C$10 but the Libyan government's national oil company has suggested that it will block the deal and buy out Verenex instead. This has introduced political and timing risk. There is some speculation that there is risk of nationalization by Libya (my geopolitical view is that it is unlikely given how Libya is trying to shun its past and enter the world's free market.) The original Chinese deal would have closed quickly but the Libyan one could drag on. The stock has sold off and is now around 15% below the offer price. The deal is in Canadian dollars (and the stock is on the TSX) so Americans will be exposed to currency risk (but if the US$ declines, one will benefit.)

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