Tag Archives: M&A Arbitrage

Special situation Quickie: Acacia/Cisco & Grandvision/ EssilorLuxottica

First of all thanks to the readers that mentioned these two potential M&A arbitrage situations.

Acacia/Cisco

Acacia, a US based received a take over offer from Tech Giant Cisco valuing the company at 2.6bn or 70 USD per share. The offer price included a 46% premium on the undisturbed price. The stock traded at the time of writing at 64,75 USD, indicating a 5,25 USD or a 8,1% premium.

The transaction is expected to close at the end of Cisco’s Q2 FY 2020 which if I have read it correctly translates into January 2020.

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Metro take over – quick assesment

After reading “Merger Masters” I decided to practice my new found knowledge a little bit and apply it to Metro. My long time readers know that I bought Metro as a spin-off and exited with a pretty painful loss.

The Czech billionaire Daniel Kretinsky, who became Metro shareholder a year ago, made a voluntary offer of 16 EUR per Metro common share and 13,80 EUR per pref share. Little is known how Kretinsky actually became a bilionaire, as he is now only 45 years old. Maybe it helped that he married the daughter of another Czech billionaire, Petr Keller. Some call him a Czech “oligarch”. Up until now, he mostly invested in the energy space, most notably buying coal assets in Germany.

 

Metro Management has already rejected the offer as too low, so the deal is clearly a “hostile” one.

From the Merger Masters book, I use the initial checklist to quickly assess the opportunity:

  1. What is the srpead ? What is the annualized return ?
    –> 0%, stock price trades at offer price at the time of writingm the pref share even above the offer price
  2. What are the regulatory issues/hurdles
    –> Most likely no big hurdles. Acquirer is not active in this industryy
  3. What are the conditions of the agreement
    –> unlcear. Unspecified “Minimum acceptance” level
  4. What is the strategic rational of the deal
    –> unclear. Buyer has no experience in retail. Most likely “opportunistic” and/or real estate driven
  5. What is the downside if the deal breaks ?
    –> – 10 to -15% (my estimate)

So based on this first assesment, the situation doesn’t look very interesting. For a hostile deal one should expect some sort of premium which doesn’t exist. The major issue is clearly that there is little information about the acquirer and his motives.

On the other side, the market seems to expect clearly a higher bid, otherwise the current price makes no sense. However I cannot think of any other bidder for Metro but maybe I am wrong.

So my assesment here is clear: At this price the risk/return profile for Metro is not worth it and I’ll pass.

P.S.: Does any reader know how the current legal situation is for German Prefs ? WIll an acquirer need to pay the same price as for the common shares

 

 

Book review: “Merger Masters – Tales of Arbitrage”

Merger Masters, written by Kate Welling and supported by Mario Gabelli is a book similar to Jack Schwagers “Market Wizards” series, portraying some famous investors.

In this case the focus is on investors who are active mostly in the Merger Arbitrage Business, Some guys are very well known like John Paulson, Paul Singer or guy Wyser-Pratte but from other guys, who keep a low profile, most invetsors might have never heard of.

Personally I wish this book would have been written long ago and that I head read it long ago. It really offeres a very comprehensive view into this relatively arcane world of arbitrage investing with some very suprising insights.

It is also clear that there is not ONE recipe to be successful as an Arb. For instance the question on when to sell when a deal breaks divides these guys into two groups: Some of them say the only way is to sell directly after the news whereas others say that you should never sell directly but wait for a better price. Other notable differences are levels of concentration, use of leverage and if hostile deals are part of the universe or not.

I was also surprised on the depth of fundamental analysis that most of these guys seem to be doing before entering into a deal, at least they claim to do so.

What makes the book really special and even better than the Market Wizard series is the fact that there is also space for the “other side”, CEOs who have fought the Arbs in hostile deals an ultimately won. Most interesting was the story about the take over attempt of Airgas by Air Products which is described in very good detail and how Airgas Managment ultimately won although the odds were highly against them.

The content is clearly US centric, however I think most of the mentioned rules etc. can be applied internationally.

Summary:

Overall, the book is extremely well written and offers a unique deep insight into the M&A arbitrage world. There is a lot of content in the book and I think I have to read it at least a second time to digest all of it.

Overall I can recommend the book highly to any investor, because sooner or later one will be involved in such a situation. For “special situation” investors this book is a MUST. For me clearly one of the best investment books that I have ever read.

Special situation: Whole Foods (WFM) – “free options” anyone ?

A few days ago, Amazon famously announced to take over Whole Foods Market for 42 USD per share (representing a premium of around 27%).

Markets enthusiastically welcomed this move from Amazon, with the Amazon share jumping almost 4% or ~13 bn USD, which coincidently was almost equal to the deal amount.

Whole Foods itself was “under siege” from activist investor Jana which had built up a 9% stake in the company. Just 2 days before the takeover, Whole Foods CEO called Jana “greedy bastards” indicating that he was not happy having such a shareholder.

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