Monday, November 15, 2010
Merger arbitrage investing has long been likened to "picking up pennies in front of a steamroller". The idea behind that statement is that the strategy will not generate outsized returns (though some individual transaction can), and if you are not careful there can be significant downside. Done successfully, arbitrage provides steady, uncorrelated returns. A current transaction that can pay the bills is Syniverse Holdings Inc's (SVR) pending acquisition by the Carlyle Group.
SVR is a leading provider of technology and business solutions for the global telecommunications industry, providing a full portfolio of mobile roaming, messaging and network solutions. On October 28, SVR announced that it entered into a definitive agreement to be acquired by Carlyle for $31/share, or $2.6 billion. The deal price values SVR at 10.8x LTM EBITDA. SVR's five-year average multiple is 8.3x, with a high of 12.0x in December 2005 and a low of 5.3x in December 2008. SVR's peer's have traded at an average of 7.5x. Prior to the $31/share deal (which was a 30% premium to SVR's prior close), the stock traded over the previous five years at an average of ~$16/share, with a range of ~$7 to $24/share. We have discussed the importance of a control premium in earlier posts, and it is represented in this buyout. The transaction has fully committed financing, consisting of equity provided by Carlyle Partners V, a $13.7 billion buyout fund, and debt provided by Barclays Capital and Credit Suisse.
In late July, SVR terminated its shareholder rights plan (poison pill) "in light of the returned stability and orderly trading" of SVR shares. The plan was implemented in late 2008 with a 15% trigger. Removal of a pill implies a company is no longer concerned with a shareholder taking a large position. It would not be far-fetched to presume that CVR was considering its strategic options as far back as July. With further concatenation, one might believe that the company was well-shopped to other potential buyers, given the late July to late October time frame.
The preliminary proxy has not been released yet, so we do not know how negotiations proceeded, however a press report last week indicated that NeuStar Inc (NSR) was involved in the bidding process. It's encouraging to own a company that more than one suitor pursued. So, to run through a brief checklist, the valuation is fair (shareholder approval should not be an issue), financing is secured, and there is no regulatory risk (usually the case with a PE buyer). Not a bad risk arb situation for an allocation of capital with a 10% return annualized to a late January close.