tag:blogger.com,1999:blog-17344548717222847312015-09-16T15:22:25.709-07:00Merger ArbitrageThis blog will explore merger and risk arbitrage strategies from an investor's point of view. This will include stock arbitrage, as well as arbitrage up and down other parts of the capital structure. We will explore new deal announcements and instruct the readers on the technical detail required in risk arb.Hunternoreply@blogger.comBlogger42125tag:blogger.com,1999:blog-1734454871722284731.post-70228760950430377622010-11-29T18:28:00.000-08:002010-11-29T18:32:06.821-08:00Risk Arbitrage: Update on Dynegy<div>The landscape for Dynegy Inc (DYN) has changed drastically since we last discussed the company. Blackstone Group (BX) increased its offer from $4.50 to $5/share on November 16. The 11% increase was given no justification by BX. Sure, Seneca Capital and Carl Icahn opposed the transaction, but recall that BX’s energy investment team head, David Foley, said in October that BX was willing to walk away even at $4.51/share. Also, BX re-confirmed $4.50/share the day before it increased the offer. While it lacks brevity, we include the statement in full, as it is indeed a gem. </div><blockquote><div>Blackstone Capital Partners V L.P. today re-confirmed its affiliate’s $4.50 per share cash offer under the previously announced merger agreement with Dynegy Inc. (NYSE: DYN). This price represents a 62% premium to Dynegy’s closing share price on August 12th, the day prior to the announcement of the transaction. </div><div><br /></div><div>The Blackstone transaction has been recommended by ISS, the leading independent proxy advisory firm. If the transaction does not occur, ISS has estimated that the value of Dynegy would be $2.66 per share. Blackstone’s offer represents a 69% premium to this ISS estimate. </div><div>Blackstone’s substantial cash premium offer to Dynegy’s shareholders is subject to the receipt of an affirmative vote of 50% of Dynegy’s total outstanding shares. The shareholder vote will occur at 10AM, Houston time, on Wednesday, November 17th. </div><div><br /></div><div>Blackstone has not previously made any public communications to Dynegy shareholders, but believes investors must understand certain facts which, to date, have often been obscured by the large volume of erroneous information presented by other parties. In summary: </div><div><ul><li>Seneca has no credibility in claiming that $4.50 per share is an inadequate price because it sold 700,000 Dynegy shares at $2.93 per share on the day before the proposed merger was announced. Blackstone’s offer represents a 54% premium to the price at which Seneca sold these shares. We fail to understand how any self-described successful investor in the power sector could have so significantly undervalued its investment. </li><li>Seneca’s past involvement as an activist investor with Reliant Energy and TransAlta was followed by significant losses in shareholder value. </li><li>Seneca’s only proposed Dynegy board nominee with power industry experience, Jeff Hunter, works for a competitor of Dynegy, and his election to the Dynegy board would raise serious antitrust issues. Further, Seneca misstated the ability of Mr. Hunter to serve “in an interim management role” in its SEC filings. </li><li>Carl Icahn’s incomplete and non-binding proposal to provide Dynegy with liquidity through 2012 does not fundamentally address the long-term liquidity challenges Dynegy currently faces. Moreover, access to liquidity, in and of itself, does not build value. </li></ul></div><div>In evaluating Seneca’s campaign, Dynegy’s shareholders should be aware that Seneca Capital Investments, L.P. has experienced an 86% decline in its self-reported 13(f) securities under management (13F filings report more than $3.5 billion under management at June 30, 2007 versus $485 million as of June 30, 2010). </div><div><br /></div><div>Seneca cites its successful track record as a long-term investor in the power and energy sector, but a closer look at the facts of their involvement in several prior power investments does not provide a basis for concluding that Seneca’s involvement with Dynegy will add value. </div><div><br /></div><div><ul><li>Texas Genco. Over the twelve month period from June 2003 to June 2004, Seneca reduced its stake in Texas Genco by 81%, from 987,400 to 183,000 shares, with most of such divested shares being sold during a period when the volume-weighted average price of Texas Genco was $23.45 per share. In July 2004, Texas Genco entered into a merger agreement to sell itself at $47.00 per share. After this transaction was announced, Seneca acquired 370,300 Texas Genco shares during a period when the volume-weighted average price was $46.41, but the deal was nonetheless consummated at the originally proposed share price. </li><li>Reliant Energy. Within a year after Seneca’s successful effort in August 2006 to add a nominee designated by institutional investors to Reliant’s Board, Seneca sold 86% of its Reliant stake. Following the addition of this director to the Board, long-term shareholders who continued to hold their shares suffered a loss of more than 71% of their equity value. </li><li>TransAlta. Seneca campaigned to block a July 2008 bid by Global Infrastructure Partners (GIP) and LS Power Equity Partners (LS Power) to acquire TransAlta. The GIP and LS Power offer was at C$39/share. Following opposition to the deal, including Seneca’s opposition, GIP and LS Power withdrew their offer. TransAlta shares subsequently fell and recently closed at C$20.41, a 48% decline from the GIP/LS Power offer price. </li></ul></div><div>Three months have passed since the announcement of the Blackstone transaction, and Seneca has yet to advance a credible plan to create value above the $4.50 per share deal price. Their only specific proposal is to suggest that they would nominate two directors to Dynegy’s Board. </div><div><ul><li>Seneca proclaimed that one of its prospective nominees, Jeff Hunter, would have the ability “to assist in an interim management role” with Dynegy. In response, Mr. Hunter’s current employer, US PowerGen, promptly issued a press release stating that Mr. Hunter did not have permission to serve in any management capacity at Dynegy. </li><li>Mr. Hunter, as Chief Financial Officer, was a key member of senior management that engineered US PowerGen’s 2007 acquisition of BostonGen for $3.2 billion. This acquisition ended unsuccessfully when BostonGen filed for Chapter 11 bankruptcy protection in August of this year. BostonGen is now in the process of being sold for $1.1 billion to Constellation Energy Group. </li><li>US PowerGen is a merchant power company that competes with Dynegy in the New York and New England markets. There will be a conflict of interest and potential antitrust issues if Mr. Hunter, an executive officer and equity owner of US PowerGen, also serves as a board member of Dynegy, with access to Dynegy’s confidential information relating to those competing markets. </li><li>The simple fact is that Seneca does not have a history of effecting positive change via board representation. Indeed, Seneca’s own Founder, Doug Hirsch, served as a board member at GMAC from 2006 until his departure in May 2009, when he left the board in the wake of approximately $12.5 billion of bailout assistance to GMAC. </li></ul></div><div>Finally, Carl Icahn’s incomplete and non-binding proposal (submitted three business days prior to the shareholder vote) to replace Dynegy’s existing credit facility, even if it buys the Company some time, will present a day of reckoning at its initial maturity in 2012. If the company cannot repay or replace the Icahn credit facility upon maturity, Mr. Icahn would be in a commanding position to declare a default and force a bankruptcy filing in which he would rank ahead of existing bondholders and shareholders of Dynegy. Under those circumstances, Mr. Icahn, as Dynegy’s most senior creditor, would be in a privileged position to acquire the Company for the value of his debt. Even if asset sales were to occur (as would be permitted under his preliminary proposal), the consequence would simply make it more likely that his credit facility would be repaid at maturity. From the perspective of Dynegy shareholders, though, selling assets will exacerbate the $1.6 billion of negative free cash flow projected by the Company between now and 2015, making even more acute the continuing risks being borne by such shareholders. </div><div><br /></div><div>While Mr. Icahn has implicitly suggested he could be a bidder for Dynegy if the Dynegy/Blackstone transaction is voted down, this interest at an unspecified valuation is inconsistent with Mr. Icahn’s failure to engage with the company during its two year “pre-shop” and the more recent, widely publicized, 40-day “go-shop” period. Indeed, unlike eight other parties, Mr. Icahn did not execute a non-disclosure agreement to receive confidential information during the go-shop period. </div><div><br /></div><div>Blackstone believes that its offer of $4.50 per share, which represents a 62% premium to the unaffected share price and a 69% premium to the ISS estimate of Dynegy’s value if the Blackstone transaction is not consummated, remains a full and fair valuation and eliminates the substantial downside risk that will result from the failure of the merger to be approved by stockholders. </div></blockquote><div></div><div>We agree with each argument BX makes. While it was refreshing to see BX finally come out in support of the original transaction, it was equally dismaying that the offer was increased the following day with no explanation. It’s things like this that make arbitrage frustrating at times. Even being the consummate skeptics that we are, if you can’t take BX at its word on the cogent argument included above then it makes investing in the space that much more difficult. And of course DYN traded through $5/share after the deal price was revised, because who is going to believe BX’s “best and final offer” language after how they have conducted themselves up until this point. One needs only to listen to Stephen Schwarzman on a conference call or any other public forum to know that he is two sandwiches shy of a picnic basket, but it is widely understood that Tony James has run the show at BX since his arrival in 2002, and we expected more from him than this.</div><div><br /></div><div>Naturally, Seneca and Icahn continued to oppose the new price. The shareholder vote was postponed from November 17 to November 23. On the morning of the 23rd, DYN announced that it intends to immediately commence an open strategic alternatives process (thereby caving to Icahn). DYN said that it anticipates that the BX proposal will not receive the necessary votes to be adopted, and that while they intend to terminate the agreement, the shareholder vote will still be held. Admittedly, we are not M&amp;A bankers in the Power sector, but the go-shop period that had 42 parties contacted and eight confidentiality agreements executed seems pretty thorough to us. DYN also adopted a shareholder rights plan which they state is not intended to prevent a sale of the company, but “to prevent any person from obtaining control or de facto control of Dynegy without offering a control premium”. The plan has a 10% threshold. </div><div><br /></div><div>Sure enough, the necessary votes were not received and the merger was terminated. We wish them well, but DYN shareholders are likely to learn just like Dollar Thrifty Automotive Group (DTG) shareholders did that a bird in the hand is worth two in the bush.</div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-57502397392173386112010-11-15T20:41:00.000-08:002010-11-15T20:42:40.195-08:00Risk Arb: Syniverse (SVR)<div><a href="www.merger-arbitrage-investing.com">Merger arbitrage investing</a> 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.</div><div><br /></div><div>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. </div><div><br /></div><div>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.</div><div><br /></div><div>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 <a href="http://www.merger-arbitrage-investing.com">risk arb situation</a> for an allocation of capital with a 10% return annualized to a late January close. </div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-14526814681063577092010-11-01T19:50:00.000-07:002010-11-01T19:54:38.229-07:00Risk Arb: Pre-Paid Legal Services (PPD)<div>On October 25, Pre-Paid Legal Services Inc (PPD) announced that it is evaluating strategic alternatives, including a possible sale of the company. The board established a special committee comprised of independent directors to lead the process. Also disclosed was that the committee has been evaluating an offer "from a well-known private equity firm to acquire all of the outstanding shares of the Company's common stock in a merger at a price of $60.00 cash per share. Among other terms, the proposal allows for the offeror to pay a to-be-determined amount to the Company as the offeror's sole recourse in the event that it is not able to obtain financing to complete the transaction." Let's take a closer look at this <a href="http://www.merger-arbitrage-investing.com/">risk arb</a> situation.</div><div><br /></div><div>The vast majority of transactions are discovered by the public in the following ways: 1) The companies mutually announce a deal. 2) A press report relays what sources are saying. 3) A company announces a strategic alternative review. What is unusual about the PPD announcement is that it included the type of buyer (financial sponsor vs. strategic), the proposed price, and that it is contingent on financing. This last point should not go overlooked. At $60/share, PPD carries an enterprise value of $593 million. The announcement implies that the prospective buyer does not have committed financing. Assuming the numbers work (otherwise, why make the offer?), a "well-known private equity firm" should be able to easily secure financing for a deal this size. </div><div><br /></div><div>Using the description from Bloomberg, PPD develops, underwrites, and markets legal service plans. PPD's plans provide for or reimburse legal service benefits, will preparation, traffic violation defense, automobile-related criminal charges, and letter writing, among other services. A $60/share takeout price values PPD at 4.9x LTM EBITDA. This multiple is noticeably below PPD's five-year average of 5.7x. The offer price was a 7% premium to the previous closing price. PPD closed as high as $67.67/ share on September 29. As expected, the shares closed with a negative spread the day of the announcement, at $62.74/share. On PPD's October 27 earnings call management said that the strategic review is a "process that will continue for the coming months".</div><div><br /></div><div>In a letter to the special committee dated October 30, Thomas Smith (representing Prescott Investors, a 25.3% holder of PPD) gave his views on the proposal. Apart from being the largest shareholder, Mr. Smith was a board member of PPD from 2004 through February 2010, and has been a shareholder since 1996. Here is the relevant passage of that letter:</div><blockquote><div></div><div>With that background, we commend the Special Committee for taking steps to evaluate strategic alternatives to enhance shareholder value, as noted in Pre-Paid’s press release on October 25, 2010. We do, however, strongly recommend that the Committee move expeditiously in its evaluation given the current fragility of the financing markets. We believe that the offer of the unidentified private equity firm that was noted in the company’s press release was appropriate in terms of price, and although the offer has since been withdrawn, we understand that the private equity firm remains interested in pursuing a transaction. The private equity firm’s offer has the added benefit of allowing Pre-Paid to reduce its exposure to any downward trend in financing markets, as we understand that the potential buyer has completed due diligence, is fully financed and prepared to negotiate a merger agreement immediately. In addition, we understand that the buyer would maintain Pre-Paid’s headquarters in Ada, OK, which would preserve the company’s strong ties within the local community.</div><div><br /></div><div>The Prescott Investors will continue to be supportive and constructive shareholders of Pre-Paid, as we have been over the past 14 years. While we support the Committee’s plan to evaluate all viable strategic alternatives, we caution that time is of the essence and urge due consideration of the existing opportunity for value realization by Pre- Paid’s shareholders. In order to facilitate a transaction that is in the best interests of shareholders, the Prescott Investors are prepared to either sell all of our Pre-Paid stock or participate in the buyout offer, in either case, on terms that we deem to be appropriate.</div></blockquote><div>There are several interesting things to note from this. The first is that the largest holder, and a former board member (who presumably knows the company) is willing to sell a stock at $60/share which was at $67.67/share one month before. The second noteworthy item is that “the offer has since been withdrawn”. Wait, where did they learn that information, and why hasn’t the company disclosed this? Another area of concern is “the potential buyer has completed due diligence, is fully financed and prepared to negotiate a merger agreement immediately”. Recall that the October 25 announcement says that financing is not secured, and now we are told it is. More importantly, call us crazy, but isn’t a withdrawn offer the opposite of standing ready to negotiate an agreement immediately? Too much uncertainty for us right now, though we await the next bit of news. </div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-88868296656906972222010-10-25T17:52:00.000-07:002010-10-25T17:53:10.329-07:00Risk Arbitrage: Dynegy (DYN)<div>An ongoing transaction that is attracting attention is Blackstone Group's (BX) acquisition of Dynegy Inc (DYN). Announced on August 13, the $4.7 billion deal is facing investor opposition, and DYN has been forced to argue the merits of the transaction. The $4.50/share deal price represents a 62% premium to DYN's August 12 close. DYN was permitted to solicit alternative proposals for 40 days. In a separate deal, NRG Energy (NRG) signed an agreement with BX to purchase natural gas-fired DYN assets in California and Maine for $1.36 billion. It is the NRG agreement with BX that has caused the uproar. Here's the math: At $4.50/share, DYN's equity value is $540 million. Selling $1.36 billion of DYN assets (after the buyout) nets BX an $820 million profit at day one. Speculation was that BX would then just issued itself a dividend with these funds, and if that is the case, why wouldn't DYN just sell the assets to NRG independently and keep the gains to itself? Let's take a closer look at this <a href="http://www.merger-arbitrage-investing.com">risk arb situation</a>.</div><div><br /></div><div>DYN stands to lose a $1.9 billion credit facility after the takeover. DYN is a highly leveraged company (levered ~10x, compared to its peer group of 3.5x to 6.5x, by the company's own account) and it needs that facility. The $1.9 billion is subject to redemption upon a change of control, so the proceeds from the NRG sale are needed to replace this credit line. Let's suppose for a second that BX wanted to employ the "scorched earth" tactic, and buy DYN, sell the assets to NRG, pocket the proceeds, and just let DYN fall into bankruptcy. Well, even that cannot happen, since DYN's credit agreements do not permit any meaningful dividend to be paid. Additionally, Delaware law would not permit a public company to issue dividends with financial forecasts like DYN's (negative cash flow projected through 2015).</div><div><br /></div><div>On September 23, DYN announced the expiration of the go-shop period, during which Goldman and Greenhill contacted 42 parties, executed eight confidentiality agreements, and did not receive any acquisition proposals. That's a pretty thorough process, so the attention is now on the November 17 shareholder vote. A press report on October 7 indicated that hedge funds would soon be disclosing positions in DYN to band together and vote against the BX deal. Also in the press was an interview with the BX professional who headed up the DYN deal team where he said that he was willing to walk away even at $4.51/share. Not really sure what the dissident shareholders want, but it would be unwise to assign a high probability to an increased offer from BX.</div><div><br /></div><div>Sure enough, Seneca Capital disclosed a 9.3% active position in DYN on October 7. Not to be outdone, Carl Icahn followed suit with a 9.9% active position five days later, and stated that he does not "believe that the consideration agreed to in the proposed merger is adequate".</div><div><br /></div><div>DYN has stated its case in presentations to shareholders. It argues that the BX transaction is the best alternative, and highlighted the extensive strategic review that was conducted. DYN believes that "unrealistic and unsubstantiated market speculation will significantly harm stockholder value if the Blackstone transaction is not completed". DYN said that its board had previously considered various asset sales, but any proceeds would be needed to support existing collateral needs and help fund ~$1.5 billion of currently projected negative cash flow over the next five years. Also, any asset sales would increase DYN's leverage and further limit future access to the capital markets.</div><div><br /></div><div>Icahn is supposed to meet with DYN executives the week of October 18. It's unclear what he seeks to discuss. Some say he wants to take BX's spot and acquire DYN himself (highly unlikely). If that is the case, then he will certainly wait until after an unsuccessful shareholder vote, since the termination fee will change from $50 million to just covering $10 million of expenses. The spread has been negative since the deal's announcement and DYN closed as high as $5.10/share on September 2. Taking a position on this event is a tough call. You can't expect a white knight, and BX is disinclined to increase its offer, so going long is a risk. Also, the vote will surely be contested. As for going short, remember what happened with Cedar Fair LP (FUN)? That was a similar situation, and being short was the wrong play. If we had more clarity on the vote (i.e. conviction it would be successful) then short would be the way to go. As for now, we are merely spectators.</div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-14686932995180007782010-10-04T18:56:00.000-07:002010-10-04T18:57:29.817-07:00Merger Arbitrage: Recent M&A Activity<div>Let's take a moment to look at recent happenings in the <a href="http://www.merger-arbitrage-investing.com">merger arbitrage space</a>.</div><div><br /></div><div>Deals that have closed recently are AmeriCredit Corp, Contiental Airlines Inc, NBTY Inc, and Hewitt Associates Inc.</div><div><br /></div><div>Bloomberg reported that Isilon Systems Inc (ISLN) has retained Frank Quattrone's Qatalyst Partners to explore a possible sale of the company. Qatalyst is the firm that ran the wildly successful auction of 3PAR Inc, and investors are likely to expect a similar process for ISLN. Drew Guevara, head of west coast Technology banking for Morgan Stanley, remarked how only 1% of deals involving publicly traded companies result in bidding contests. Takeover expectation is certainly priced into ISLN, as the stock is up 319% YTD.</div><div><br /></div><div>Potash Corp (POT) is still being pursued by BHP Billiton (BHP), and the $130/share unsolicited tender offer is scheduled to expire on November 18. China's Sinochem Group is reportedly drumming up interest for a rival bid, but is said to be having trouble finding partners and financing.</div><div><br /></div><div>Sanofi-aventis (SNY) formally launched a hostile $69/share tender offer for Genzyme Corp (GENZ). SNY's language on the conference call it held for investors indicated that they are committed to a successful acquisition. A higher offer is required to obtain that outcome.</div><div><br /></div><div>Dollar Thrifty (DTG) shareholders voted down the merger with Hertz (HTZ) last week, and HTZ terminated the agreement on October 1. Expect the final terms on a deal with Avis Budget Group (CAR) to be slightly different that previously offered. If the earlier proposal was acceptable to DTG then a definitive agreement should have been reached by now.</div><div><br /></div><div>Last week saw the departure of more names than usual, due to the end of the third quarter, but replacements are seemingly being offered daily.</div><div><br /></div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-36055136957724505492010-09-27T18:15:00.000-07:002010-09-27T18:19:34.730-07:00Risk Arbitrage Updates: Pactiv and Dollar Thrifty<div>When we last discussed the <a href="http://www.merger-arbitrage-investing.com/2010/08/merger-arbitrage-analysis-pactiv-ptv.html">risk arbitrage situation in Reynolds Group Holdings’ pending acquisition of Pactiv Corp (PTV)</a>, we said that HSR (US antitrust) review was the main concern. That hurdle was cleared on September 23, when PTV announced that the HSR waiting period expired. A few weeks ago, this was not the mainstream expectation. Once investors began to have a firm grasp on the competitive impacts of the combined company, the spread gradually tightened into the waiting period’s expiration date. The shareholder remains unscheduled, but the companies reaffirmed a deal closing by the end of 2010. The spread closed on September 24 at 1.0%. This is priced as a low-risk deal at this point. </div><div><br /></div><div>Dollar Thrifty Automotive Group Inc (DTG) has been an active name since our initial review. Recall that both Hertz Global Holdings Inc (HTZ) and Avis Budget Group Inc (CAR) argue that they are in a more favorable position to successfully acquire DTG, from an antitrust perspective. On August 26, CAR received a second request from Canadian regulators, a requirement that HTZ fulfilled in early August. </div><div><br /></div><div>On September 2, CAR increased the cash portion of its offer from $39.25 to $40.75/share, with an unchanged exchange ration of 0.6543. Provided in CAR’s press release is a little snapshot of the mudslinging that can take place between rival bidders. </div><div><br /></div><div></div><blockquote><div>Contrary to certain Dollar Thrifty and Hertz statements, a reverse termination fee has nothing to do with certainty of closing. Economic compensation for failing to close does not impact whether a deal is reasonably likely to close. The Hertz deal is no more likely to be approved by the FTC simply because Hertz agreed in the context of a negotiated deal to pay a fee to Dollar Thrifty if it is not approved. </div><div><br /></div><div>Both deals raise complex and similar antitrust issues and face comparable divestiture analyses. Hertz resorts to antitrust as a scare tactic and a smoke screen -- a last-ditch effort to deflect attention from its clearly inferior offer -- but Hertz is wrong on the process and wrong on the facts. Although outcomes of governmental reviews cannot be predicted with certainty, both companies are cooperating with an ongoing FTC review. Both companies have similar airport revenue shares and derive more than half of their revenues from leisure travelers -- although, significantly, Hertz has higher leisure renter revenues than Avis and Budget combined. </div><div><br /></div><div>Both companies compete with Dollar Thrifty. In fact, Hertz uses its exclusive relationship with AAA to generate more than $500 million of annual revenues at low price points -- typically lower than Dollar and Thrifty rates -- targeted to compete directly with Dollar, Thrifty and other value brands. Through the value-oriented AAA relationship "brand," Hertz competes aggressively and successfully with other value brands and generates revenues that are comparable to Thrifty's U.S. corporate location revenues. </div><div><br /></div><div>Furthermore, nothing blocks any of the market participants from renting cars to value and leisure oriented customers as there are no barriers to entry (with the exception of the Hertz exclusive agreement with AAA, which covers 50 million members). Pricing can be adjusted in seconds on each company's respective corporate websites and the related travel oriented websites.</div><div><br /></div><div>CAR is correct – the inclusion of a reverse termination fee does not impact a regulator’s opinion of a transaction. It does, however, affect a board’s decision on deciding between competing offers with “complex and similar antitrust issues”. DTG wants assurance that they will receive some remuneration should a deal not be consummated.</div></blockquote><div></div><div><br /></div><div>Since CAR’s revised offer was 22% higher than the HTZ deal price, you know HTZ will have to increase its offer. That happened on September 12, when the merger agreement was amended to increase the cash portion by $10.80 to $43.60/share and maintaining an exchange ratio of 0.6366. The $44.6 million reverse termination fee was also unchanged. HTZ announced that it has begun the process of divesting Advantage Rent-a-Car. The shareholder vote was postponed from September 16 to 30, to allow shareholders sufficient time to consider the revised terms.</div><div><br /></div><div>CAR increased its offer again on September 23, revising the cash portion from $40.75 to $45.79/share. CAR said “We believe that the increased value is warranted based on improving fundamentals in the industry and at Dollar Thrifty in particular. We would be willing to offer an even higher price in the absence of the break-up fee that Dollar Thrifty's Board has provided for in its agreement with Hertz. We believe it would be beneficial for Dollar Thrifty shareholders if the Dollar Thrifty Board of Directors engaged in a process to maximize value, rather than letting Hertz dictate timing and process.” CAR added that there is no justification for DTG to hold a shareholder vote before the FTC completes its review of the CAR and HTZ submissions.</div><div><br /></div><div>On September 24, HTZ affirmed that is latest offer is its “best and final”. The progress with the FTC makes HTZ “highly confident” that it can close the merger by the end of the year.</div><div><br /></div><div>CAR is not bragging about any progress with the FTC. It still has not received approval from Canada, and it refuses to offer a reverse termination fee. Without a meaningful increase in its offer price, CAR faces an uphill battle. We will continue following these <a href="http://www.merger-arbitrage-investing.com/">risk arbitrage situations</a> closely.</div><div><br /></div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-89624008408037507252010-09-20T18:45:00.000-07:002010-09-20T18:46:57.377-07:00Merger Arbitrage: Opposition to the Cogent Inc (COGT) Takeover<div>In this post, we will look at a strategic deal that is facing shareholder opposition. On August 30, 3M Co (MMM) announced a definitive agreement to acquire Cogent Inc (COGT) for $10.50/share. The cash tender offer has an aggregate value of $943 million. MMM is a research and development firm whose core strength is in applying its more than 40 distinct technology platforms to a wide array of customer needs. COGT is a biometric identification solutions provider to governments, law enforcement agencies, and commercial enterprises. MMM was attracted to COGT because of its participation in the biometric market, which MMM projected to have an annual growth rate of 20%. Let's dig deeper into this <a href="http://www.merger-arbitrage-investing.com">merger arbitrage</a> situation.</div><div><br /></div><div>The deal price was 18% higher than COGT's August 27 close. All else equal, this is considered to be on the low side for a takeover. Especially with a strategic acquirer, who is expected to squeeze synergies out of a transaction (which should, in turn, translate into a higher offer price, thereby passing the added value to shareholders). The merger values COGT at about 12.5x consensus EBITDA, while the best peer is L-1 Identity Solutions Inc (ID), which trades at about 13.5x consensus EBITDA. Not only is ID's business similar to COGT's, but ID commenced a strategic review process in February, so the stock has takeover potential baked into the price. Another detail not in MMM's favor is that COGT was trading for over $11.25/share in January. Founder and CEO, Ming Hsieh, entered a voting agreement in favor of the merger with his 39% position in COGT, but noticeably absent are other shareholders, apart from this insider.</div><div><br /></div><div>What these factors are telling us is that there's a good chance COGT was not adequately shopped. For, if it were, the competitive bidding process would have driven up the deal price to a higher valuation. We won't know about the deal background until the tender documents are released, but so far, investors are skeptical. COGT closed on August 30 at $11.09/share, for a spread of -5.3%. On September 1, Pointer Capital, Iridian Asset Management, and Corbyn Investment Management (who combined hold about 8% of COGT) came out against the merger, specifically its low valuation. Pointer Capital explained that the fundamental value of COGT exceeds $15/share.</div><div><br /></div><div>MMM commenced the tender on September 10 (due to expire on October 7), and with that, we were provided the background section of the tender documents. Similar to how a child goes straight for the comics section of a weekend paper, an arbitrageur's first stop is the background section. COGT's was of particular interest, given the aforementioned reasons. The document explains that a third party gave a preliminary non-binding indication of interest of $11 to $12/share on August 18. MMM's initial offer (of $9.25 to $10.25/share) was made on May 24. Even if you are far along in the process with one party, the board has a fiduciary duty to exhaust discussions for a credible offer that is superior. Perhaps COGT did finalize negotiations with this bidder, but the topic was left dangling in the tender document. Either way, this is a mistake on COGT's part. </div><div><br /></div><div>Pointer Capital again took offense to the newly-public information. In a thoughtful letter to the COGT board on September 14, the Atlanta-based investor noted:</div><div></div><blockquote><div>The Company provided 3M with financial estimates through 2013. The most noteworthy item was the drastic cut in gross margins beginning in 2011. The Company projects 66 percent gross margins in 2010, in-line with management's historical projections of 60 to 65 percent. However, 2011 estimates show a reduction to 57 percent gross margins. During the second quarter earnings call, the Company continued to reiterate that 2011 looks promising and was excited about business prospects.</div><div><br /></div><div>How does this compare to the fact that management is now projecting a 900 basis point decline in gross margins year over year? Should the gross margins remain at historical levels, we believe the Company would produce in excess of $60 million of EBITDA in 2011. Are these estimates that management provided to 3M too conservative or has there been a material adverse change to the outlook by Cogent's management?</div></blockquote><div>In the announcing press release on August 30, the companies said that the expected close is in the fourth quarter. This is acceptable, especially since it is a tender offer (and antitrust approval was granted on September 10). However, Pointer Capital identifies a potential motivation for the timing of the transaction:</div><div><blockquote>It appears to us that December 30, 2010 is an arbitrary date with one caveat: the proposed tax changes to long-term capital gains. At $10.50 per share, it is unlikely that many shareholders have long-term gains at this price so the proposed tax change may be a moot point. The only shareholder with a significant long-term capital gain to speak of is the Company’s CEO. While we understand his position, the lack of fiduciary responsibility to shareholders is very evident.</blockquote></div><div>COGT has yet to respond to the shareholder opposition. With a Q2 cash balance of $3.0 billion, MMM can afford to increase the offer price. A higher offer is not out of the question, but we encourage investors to be mindful of chasing this too high. Sure, another 3PAR Inc (PAR) could happen, but that’s unlikely, and no one anticipated what happened there. </div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-30059699130880627322010-09-10T11:34:00.000-07:002010-09-10T11:38:41.361-07:00Risk Arbitrage: The Battle for 3Par<div>A bidding war for 3PAR Inc (PAR) ended last week, with Dell Inc (DELL) and Hewlett-Packard Co (HPQ) driving the price up to levels that surprised many investors. In just over two weeks, PAR's share price increased 240%. Let's review how this <a href="http://www.merger-arbitrage-investing.com/">risk arbitrage</a> situation unfolded.</div><div><br /></div><div>On August 16, DELL announced a definitive agreement to acquire PAR for $18/share in a $1.15 billion cash tender offer. PAR provides a virtualized utility storage platform addressing limitations of monolithic and modular arrays, and can reduce storage administration costs by up to 90% and infrastructure costs by up to 75%. The offer price was an 87% premium to PAR's previous close and valued the company at about 5x LTM revenues. 33% of PAR shareholders executed voting agreements in favor of the DELL transaction. The spread closed that day at $0.0, indicating that investors are confident in a deal being completed. The spread widened to $0.07 on August 17 as comfort with the merger was widespread. After all, the valuation was attractive, the price premium was large, and a third of the shareholders have already signed off on the terms.</div><div><br /></div><div>Enter HPQ. On August 23 HPQ announced that it had submitted a $24/share cash offer for PAR. The $1.6 billion price was 33% above DELL's definitive agreement. A rival bid this much higher than the initial deal price is extremely rare. We know right away that HPQ is serious. Latest figures show that DELL has $11.7 billion of cash on hand compared to HPQ's $14.7 billion. Both companies can clearly afford to pay more for PAR. The obvious question is who is willing to pay more. PAR's board has a fiduciary duty to obtain the best offer for its shareholders. At this point in the bidding, HPQ appears to be more determined to win PAR, evidenced by the boldness of its initial offer. PAR closed at $26.09/share on August 23 for a -8% spread.</div><div><br /></div><div>PAR's board determined that HPQ's offer is "reasonably likely to lead to a 'Superior Proposal' (as that term is defined in the Merger Agreement)". This language always conjures a laugh. Of course it's superior. At any rate, the matching rights afforded to DELL dictate that it has three business days to negotiate an amendment to its merger agreement. Shortly after the market opened on August 26, PAR accepted an increased offer from DELL of $24.30/share. Immediately after the close, HPQ announced a revised proposal of $27/share, or an enterprise value of $1.8 billion. See the trend here? DELL is nickel and diming while HPQ is looking for the knockout. Of course, at a certain level HPQ's tactics will irritate its own shareholders, but they have no say in a cash transaction. </div><div><br /></div><div>On August 27, PAR accepted the matching offer of $27/share from DELL. Two and a half hours later, HPQ increased its proposal to $30/share. PAR closed at $32.46/share on August 27 for a -7% spread. On September 2, HPQ increased its offer to $33/share. One hour later, DELL announced that it will not increase its offer, and that it ended discussions regarding a potential acquisition. PAR paid DELL a $72 million termination fee. Later that evening, HPQ announced its definitive agreement to acquire PAR for $33/share, or $2.35 billion. The tender offer expires on September 24.</div><div><br /></div><div>Oh, to have been long PAR before the initial offer…</div><div><br /></div><div><a href="http://3.bp.blogspot.com/_gtR4KkpmjKs/TIp7FIr-gYI/AAAAAAAAAQE/c6PU9CsApuU/s1600/3par+risk+arbitrage+merger+arbitrage.jpg"><img src="http://3.bp.blogspot.com/_gtR4KkpmjKs/TIp7FIr-gYI/AAAAAAAAAQE/c6PU9CsApuU/s400/3par+risk+arbitrage+merger+arbitrage.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5515356021830091138" style="cursor: pointer; width: 400px; height: 286px; " /></a></div><div><br /></div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-58908118391708460362010-09-02T18:46:00.000-07:002010-09-02T18:47:11.222-07:00Risk Arb: Lions Gate (LGF) – Icahn Persists<div>It's time to resume our review of <a href="http://www.merger-arbitrage-investing.com/2010/04/risk-arbitrage-and-tender-offers-lions.html">Carl Icahn's pursuit of Lions Gate Entertainment Corp (LGF).</a> We have discussed his unsolicited offer several times in the past, and new events (some would say Icahn's stubbornness) have brought about more details to cover. For a quick review, Icahn announced a tender offer on February 16 of $6/share to increase his holdings from 18.9% to 29.9%. Icahn increased his proposal to $7/share on April 15 for all the shares he did not already own. By the June 16 tender expiration, Icahn owned 31.8% of LGF. Icahn lowered his offer to $6.50/share on July 20, at which point he already owned 37.9%. Icahn also disclosed his intention to replace the entire LGF board. On the same day LGF announced the completion of a "deleveraging transaction" where $100 million of its senior subordinated notes were converted into common shares at an effective conversion price of $6.20/share. This transaction was done with Mark Rachesky, an LGF board member, which increased his holdings from 19.6% to 28.9%. It also diluted Icahn's stake from 37.9% to 32.8%.</div><div><br /></div><div>On August 31, Icahn increased his offer to $7.50/share. The revised offer is conditioned on there having been validly tendered the number of shares to constitute 50.1% ownership by Icahn. It is also conditioned on (now here is the big one) that the 16 million shares issued to Rachesky are either (i) rescinded prior to the expiry time, so that such shares are no longer outstanding; or (ii) reformed to convert such shares into a new class of non voting common shares. This offer expires on October 22. In typical Icahn prose, the announcement added "Given its recent decision to issue shares to an insider at $6.20 per share without conducting a market check, we would normally expect that the board must recommend that shareholders accept our offer of $7.50 per share, but with this board anything is possible. The Icahn Group believes that this board will stop at almost nothing to entrench its position at the expense of shareholders. However, we believe that even these directors will realize that their fiduciary duties dictate that they not deprive shareholders of the opportunity to receive a significant premium for their shares and therefore not enter into further inappropriate transactions which would breach the conditions of the offer." On the $7.50/share news, LGF closed at $7.14/share on August 31, up 10% for the day.</div><div><br /></div><div>Icahn has very likely demanded too much in his latest missive. Asking Rachesky to either undo his transaction or give up voting rights is a tough sell. We don't think it will happen. Icahn has changed conditions of his offer several times in the past. He could waive this condition and increase his offer again, thereby paving the way for a deal. Remember, Rachesky is supportive of current management and Icahn is not. It's a battle of the old guard versus the new, and this is the first time Icahn is not in the "old" camp.</div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-22224341613198217832010-08-29T14:37:00.000-07:002010-08-29T14:42:16.764-07:00Merger Arbitrage Analysis: Pactiv (PTV)<div>We have previously discussed how <a href="http://www.merger-arbitrage-investing.com">risk arbitrageurs</a> are not interested in speculating on what companies will be acquired. The majority of portfolio positions are comprised with definitive agreements. Included in the "announced transactions" bucket are unsolicited offers where the (eventual) deal price is unknown, and even situations where initial terms have not even been disclosed (GENZ). The idea here is that we're not searching for takeover candidates. One of the downsides to companies with no agreed deal is that the timeline can be inauspicious. For example, Novell Inc (NOVL) received an offer in early March and has yet to announce a deal. This post will discuss Pactiv Corp (PTV), a company for which deal speculation began three months before a merger was announced. PTV produces consumer and food packaging products, including disposable plastics, foam, pressed paperboard, aluminum, and molded fiber. The company is well known for its Hefty brand.</div><div><br /></div><div>The Wall Street Journal reported on May 17 that buyout firm Apollo was in talks to acquire PTV. The logic behind a deal with Apollo centered on Berry Plastics Corp, a packaging company that Apollo acquired in 2006 for $2.25 billion. Apollo then merged Berry with another portfolio company, Covalence Specialty Material Corp. In 2008, Berry acquired Captive Plastics Inc for about half a billion dollars. An announced transaction with PTV was said to be weeks away. PTV's share price increased 19% for the day on this news to close at $28.44/share.</div><div><br /></div><div>A few days later, the WSJ said that New Zealand-based Rank Group and Georgia-Pacific entered the bidding process. In late July, the New York Post said that Koch Industries was considering a bid for PTV. The auction process was expected to be finalized by the middle of August. (You'll notice we include the publication when we mention a news report. This is because each media outlet has its own credibility factor. If the WSJ is told by sources that a company is shopping itself, while Joe's Newswire says the same company is not, are the contrasting stories weighed equally? Not on our desk. We have our preferred publications, and we even go so far as to consider the individual reporters).</div><div><br /></div><div>On August 17, PTV announced the definitive agreement to be acquired by Rank Group subsidiary Reynolds Group Holdings for $33.25/share. The $6 billion deal represents a 39% premium to PTV's May 14 closing price, the last trading day prior to published reports regarding a transaction. The premium is 7% to PTV's August 16 close (lower, obviously, because of the expectations of a deal). The takeout price values PTV at 7.5x EBITDA. Reynolds obtained committed financing from Credit Suisse, HSBC, and Australia New Zealand Bank.</div><div><br /></div><div>Now, what can we learn about Rank Group? It turns out, the conglomerate's driving force is its principal owner, Graeme Hart. The 55-year old New Zealand native ranks as #144 on the Forbes list with a net worth of $5.3 billion. The former tow truck driver and high school dropout later returned to school and earned an MBA from the University of Otago in 1987. Using Rank Group as the vehicle for essentially a one-man buyout shop, Hart began to acquire companies, turn them around, and sell them for a profit. Lest you think our money man is driven only by the buck, in early 2007, after spotting a burning yacht off Waiheke Island, Hart rescued three people and a dog from the conflagration. The yacht soon sank, and Hart was touted for his selflessness. </div><div><br /></div><div>The spread is 3.3% as of the August 26 close. That's fairly wide for a definitive agreement with no glaring risks. Capturing that spread hinges on regulatory approval. We talk about the HSR (US antitrust) process often, and it is the driving force in the PTV deal. The combined company would have some concentration in the garbage bags and storage bags segments. Market share information for these areas is scarce, but it is safe to say that the HSR waiting period will not receive early termination. A second request is quite possible. Reynolds Group even mentioned a second request on a conference call, but they were adamant that any concerns regulators have could be resolved. Even when it's obvious a second request is expected, spreads widen when they are disclosed. In lieu of a second request, there could be one or more re-filings. </div><div><br /></div><div>The way to approach this deal is to put on a portion of your desired position now, and see what happens on the HSR front. Say you want it to be 5% of your portfolio. Take it up to 4% now, and if it widens on a second request, put on the remaining 1%. If it tightens on news of a smooth review, still put on your remaining 1%. At least you had 80% of your position established at a wider level. Can't win 'em all. Stay tuned for more <a href="http://www.merger-arbitrage-investing.com">merger arbitrage analysis</a> in the near future.</div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-8155851492556533752010-08-22T18:00:00.000-07:002010-08-22T18:02:06.264-07:002010 Merger Arbitrage Market - A Mid-Year Update<div>Of course, as soon as we mention that "the merger revival that so many strategists and analysts predicted has not occurred" yet, M&amp;A sprints off to the races. Even with the recent spurt, M&amp;A volume in the U.S. is up only 1% YTD versus 2009, according to Dealogic. Before we highlight some of the recent announcements, it's important to note that we are not claiming that the good times have returned. A solid print for one quarter of earnings does not a trend make, especially after two years of shoddy announcements, though it allows for further momentum to build. Colleagues point out to us all the time that corporations have historically high levels of cash on their balance sheets. True, but acquisitions are not the only method of deployment for said cash. (As for the "cash on the sidelines" argument people use to portend higher equity prices, we are thankful that John Hussman is cerebral enough to elucidate the fallacy of such a statement.) Also, we're not convinced the economy is positioned for an inevitable near-term rebound, and it's entirely possible that executives at these companies aren't either. While we have a more forceful opinion on this matter, this is <a href="http://www.merger-arbitrage-investing.com">merger arbitrage blog</a>, not a forum for our macro pontifications. Let's look at some situations from the last week.</div><div><br /></div><div>IBM Corp (IBM) agreed to acquire Unica Corp (UNCA) for $480 million on August 13 to help its clients streamline and integrate key processes including relationship marketing and marketing operations. Later that day, Blackstone Group (BX) announced an agreement to acquire Dynegy Inc (DYN) for $4.7 billion. This is a transaction that has caused a bit of an uproar with the media, due to the financing structure, and we will likely cover it in the future with more detail. On August 16, Dell Inc (DELL) agreed to purchase 3PAR Inc (PAR), a global provider of highly-virtualized storage solutions with advanced data management features, for $1.15 billion. Also on Monday, Canadian buyout firm Onex Corp (OCX CN) made a proposal to buy Res-Care Inc (RSCR) for $370 million. OCX owns 24.9% of RSCR, so we probably haven't heard the end of that situation.</div><div><br /></div><div>The big one came on August 17, when BHP Billiton Ltd’s (BHP) $40 billion proposal to acquire Potash Corp (POT) was made public. POT quickly implemented a poison pill, in case BHP planned on taking the offer directly to POT shareholders, which is precisely what happened. BHP launched a $130/share tender offer, but nothing under $145 has a chance of succeeding. This is another transaction we will cover in a later post with more detail.</div><div><br /></div><div>Pactiv Corp (PTV) put the final touches on its auction process on August 17 when it announced that Rank Group Ltd subsidiary, Reynolds Group Holdings, would purchase the consumer and food packaging leader for $6 billion. Rank Group is a New Zealand-based company owned by Graeme Hart, an investor whose savvy use of debt has propelled him to extreme wealth (think of him as a less-hated Ira Rennert).</div><div><br /></div><div>McAfee Inc (MFE), the security technology company, announced its agreement to be acquired by Intel Corp (INTC) on August 19. The $7.68 billion deal is INTC's first multi-billion acquisition of a public company in over 10 years. Lastly, we note the NewAlliance Bancshares (NAL) merger with First Niagara Financial Group Inc (FNFG) for $1.5 billion, also on August 19. The merger consideration is 86% in stock and 14% in cash. Again, we will provide a deeper evaluation of several of these deals in the future.</div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-40735459314244161472010-08-16T20:13:00.000-07:002010-08-16T20:18:12.800-07:00Merger Arbitrage: ATC Technology Corp (ATAC)<div>Considering how the merger revival that so many strategists and analysts predicted has not occurred, the event-driven community is in all the same names. Since there is an inadequate number of situations to follow, spreads are tight. However, ATC Technology Corp (ATAC) is an <a href="http://www.merger-arbitrage-investing.com">merger arbitrage</a> opportunity with an attractive 14% annualized return to a mid-November close.</div><div><br /></div><div>On July 19, GENCO Distribution System Inc announced a definitive agreement to acquire ATAC for $25/share in an all-cash merger valued at $512 million. Privately held GENCO provides contract logistics, reverse logistics, product liquidation, and government solutions for manufacturers, retailers, and US government agencies. ATAC provides comprehensive engineered solutions for logistics and refurbishment services to the consumer electronics industry and vehicle service parts markets. The merger consideration represents a 43% premium to ATAC's July 16 closing price. The agreement contains a go-shop provision to allow ATAC to solicit superior proposals until August 17. GENCO has been afforded the right to match any competing offers. The companies expect to close the deal during the fourth quarter.</div><div><br /></div><div>There appears to be no regulatory risk. As GENCO is privately held, they do not provide as much information as we would like, but the required antitrust approval should be a non-event. We've spoken to some investors who are concerned with financing. GENCO said that it intends to finance the acquisition through the application of proceeds of approximately $125 million from the sale of GENCO shares to Greenbriar Equity Group LLC and from borrowings under a $450 million new line of credit to be extended by PNC Bank and Wells Fargo, in addition to cash on hand. GENCO executed a definitive stock purchase agreement with Greenbriar for the equity financing. The commitment letter GENCO entered with the banks is not conditioned upon syndication of the credit facility. Taken together, the financing looks pretty stable, so perhaps those concerns are overblown. It is worth nothing that the merger agreement contains a $2 million fee payable to ATAC if GENCO is unable to complete financing. This is a fairly uncommon feature in merger agreements, and it shows that financing was a part of the negotiations.</div><div><br /></div><div>Another aspect of this transaction that could cause some to be wary is investor support. ATAC was trading over $24/share in March, so the 43% premium can be misleading. Some shareholders are bound to think that GENCO is making an opportunistic purchase. This is a valid argument, though GENCO's response will be "you have until August 17 to find a better deal". Here is the case those shareholders would make, graphically represented:</div><div><br /></div><div><a href="http://4.bp.blogspot.com/_gtR4KkpmjKs/TGn_JGzM2mI/AAAAAAAAAPc/xHVtjZfm13Q/s1600/Risk+Arbitrage.JPG"><img src="http://4.bp.blogspot.com/_gtR4KkpmjKs/TGn_JGzM2mI/AAAAAAAAAPc/xHVtjZfm13Q/s400/Risk+Arbitrage.JPG" border="0" alt="" id="BLOGGER_PHOTO_ID_5506212551346412130" style="cursor: pointer; width: 400px; height: 263px; " /></a></div><div><br /></div><div><div>The preliminary proxy has not yet been released, so we do not know if they were any other bidders for ATAC. Spreads often move on the release of this information. ATAC was asked on the July 19 conference call whether a competitive bidding process took place, and CEO Todd Peters simply answered "this is an unsolicited offer from GENCO". We don't know if Mr. Peters did not understand the question, or if he was intentionally being vague, but he did not answer the question (an unsolicited offer from GENCO does not preclude a competitive bidding process). After evaluating the risks, with the current opportunity set, one could do worse than a position in ATAC.</div></div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-2456205311752417972010-08-09T17:40:00.000-07:002010-08-09T17:43:47.831-07:00Risk Arbitrage - Dollar Thrifty (DTG)<div>With hindsight, a nice place to have looked in March of 2009, when nearly every manager was facing redemptions and thought the sky was falling, was the rental car industry. Specifically, Dollar Thrifty Automotive Group Inc (DTG) went from $0.70/share 17 months ago to over $48/share now. Let's look at what is happening to the name right now. It is a very interesting <a href="http://www.merger-arbitrage-investing.com">risk arbitrage</a> situation.</div><div><br /></div><div>Hertz Global Holdings Inc (HTZ) announced on April 26 that they signed a definitive agreement to acquire DTG for $41/share, an 11% premium to DTG's prior close. The terms consist of exchange ratio of 0.6366, $25.92/share in cash, and a $6.88/share special cash dividend to be paid by DTG immediately prior to the transaction's closing. DTG, with more than 1,550 corporate and franchise rental locations, was assigned a value of $1.6 billion. HTZ estimated that a closing would take place within six months. The market interpreted the combination favorably, as HTZ rose 14% the day of the announcement. On the conference to discuss the merger, an analyst from large hedge fund with holdings in both DTG and HTZ expressed how he thought the acquisition was a "steal". </div><div><br /></div><div>Another party who was not pleased with the announcement was Avis Budget Group Inc (CAR). On May 3, CAR CEO, Ronald Nelson, sent a letter to DTG CEO, Scott Thompson, to explain CAR's thoughts on the news. We will include it in full, because it has several important elements.</div><blockquote><div>"I was very surprised by your April 26 announcement that you had signed a definitive agreement to be acquired by Hertz for approximately $41 per share, of which only about $34 is being funded by Hertz itself. This is particularly true given that, on April 19, a mere week before the Hertz announcement, Scott and I agreed to meet for dinner on April 28 to discuss a transaction between our companies, which you cancelled after the Hertz announcement. </div><div><br /></div><div>As you know, we at Avis Budget have on several occasions in the past expressed interest in entering into a transaction with Dollar Thrifty, yet at no stage over the last several months did you or your financial advisor engage us in any discussions about a transaction or offer to provide us with information so that we might submit a bid. I spoke with your financial advisor in early April to reiterate our interest in a potential transaction between our companies and to try to arrange a meeting, yet neither they nor you engaged us in any substantive discussions or communicated your interest in Dollar Thrifty being acquired in the near term. It is hard to understand how your failure to engage in discussions with an interested strategic buyer, who you know also would be able to achieve significant synergies as a result of a combination, can be consistent with the fiduciary duties that you and your board carry to seek the best possible deal for your shareholders. </div><div><br /></div><div>This failure is all the more surprising given that, at the time you signed a definitive agreement to be acquired at virtually no premium, you clearly had knowledge that published earnings estimates for Dollar Thrifty were well below the updated guidance that you were going to provide as part of your first-quarter earnings announcement after the signing. Given that the Hertz offer is primarily cash, your shareholders in addition to being offered virtually no premium to a stock price that did not reflect favorable non-public information, would have little opportunity to participate in the substantial upside associated with your improving results, the combination-related synergies or the substantial upside we all see as the industry recovers from its recent lows. </div><div><br /></div><div>Now that we and our advisors have had access to the terms of the merger agreement, we are astonished that you have compounded these shortcomings by agreeing to aggressive lock-up provisions, such as unlimited recurring matching rights plus an unusually high break-up fee (more than 5.25% of the true transaction value, as described by your own financial advisor), as a deterrent to competing bids that could only serve to increase the value being offered to your shareholders. Given the complete failure to conduct a pre-signing market-check of the virtually no-premium deal with Hertz, such preclusive defensive measures are clearly not supportable in this situation. </div><div><br /></div><div>We would like to make a substantially higher offer to acquire Dollar Thrifty, especially in light of your recent performance and the potential synergies associated with an acquisition of Dollar Thrifty by Avis Budget. We are confident that the antitrust analysis and clearance timetable for an Avis/Dollar Thrifty transaction are comparable to those associated with a Hertz/Dollar Thrifty transaction. We request access to legal, financial and business due diligence information relating to Dollar Thrifty, including access to management, so that we can formulate and submit such an offer. In that regard, we would be prepared to sign an appropriate non-disclosure agreement. We also request that the egregious provisions of the merger agreement be eliminated so that a level playing field can be created. </div><div><br /></div><div>We look forward to the opportunity to engage in productive discussions with the board of directors of Dollar Thrifty to allow its shareholders the opportunity they deserve to realize the full value of their investments in Dollar Thrifty."</div></blockquote><div></div><div>DTG closed at $50.70/share on May 3, up 15% for the day.</div><div><br /></div><div>On May 6, CAR signed a confidentiality agreement with DTG to review financial data to evaluate a possible offer for DTG. HTZ CEO, Mark Frissora, repeatedly remarked how the HTZ offer for DTG is superior "on both financial and regulatory" grounds. That may be true, but what is the offer? Here is a helpful (facetious) note to management teams out there: if you want investors to evaluate your offer, and potentially agree with your "superior" argument, then providing terms of the offer is essential.</div><div><br /></div><div>In mid-June, both HTZ and CAR received Second Requests (requests for additional information to conduct the antitrust review) from the Federal Trade Commission. From an antitrust perspective, it all depends on how the FTC will define markets. Law professor Steven Davidoff contributes valuable thoughts on the topic. He said that if the rental care market is segmented into the two categories, premium and travel/leisure, then both HTZ and CAR classify themselves as premium car rental companies serving those on business and those who are less sensitive to price changes. DTG categorizes itself as travel/leisure. However, you can also classify the market by airport and off-airport. In this manner, both HTZ and CAR compete with DTG. HTZ stated on the merger call that they have 26% of the airport market share and DTG has 11%. HTZ also said that the FTC will probably carve down market share if it is over 40% or 50%.</div><div><br /></div><div>On July 6, DTG scheduled a shareholder vote on the HTZ deal to be held on August 18. Doing so effectively set a time frame within which CAR must operate if it wanted to bid for DTG. Yes, it could present an offer after the vote, but this could delay the merger, a move that shareholders would not happily accept. To further nudge CAR to make a superior offer, DTG announced on July 7 updated guidance of 2010 EBITDA of $200 to $220 million, versus the previous range of $170 to $190 million. The company also provided an updated outlook for fleet cost per unit per month for 2011, which was lowered to a range of $300 to $310/month, compared to previous guidance of $325/month.</div><div><br /></div><div>On July 19, DTG rescheduled the shareholder vote for the HTZ merger from August 18 to September 16. No reason for the postponement was immediately provided, but the following day it was disclosed that the SEC stated that additional time was required for DTG shareholders to be notified of their rights in the merger.</div><div><br /></div><div>On July 28, nearly three months after it publicly disclosed interest in DTG, CAR announced the terms of its offer. The offer was valued at $46.50/share ($39.25/share in cash and 0.6543 of CAR stock). CAR has fully committed financing for the cash portion. CAR said it was prepared to enter into a merger agreement with substantially the same terms as the HTZ agreement, but which includes removing the matching rights, eliminating the break-up fees, and increasing the commitment to secure antitrust approvals.</div><div><br /></div><div>DTG responded to CAR's proposal on August 3 and gave some observations on the offer. DTG said that CAR's offer is more favorable, from a financial point of view, to its stockholders than the HTZ merger, and that it has fully committed financing to support the bid. Where DTG said it does not have sufficient information is in determining if the CAR transaction is reasonably expected to be consummated on a timely basis. The letter to CAR indicated:</div><blockquote><div>"As you are aware, our respective advisors have had numerous discussions with respect to the antitrust risks attendant to a merger of our companies. Your legal advisors have stated clearly their position, based on their econometric and other analyses, that the divestitures to which you have committed in your proposal are sufficient to remediate any competitive issues. But citing our inability to enter into a joint defense agreement with you as well as our contractual obligations to cooperate with Hertz, your advisors have been unwilling to disclose details of their data and analyses beyond their general approach to the issues.</div><div><br /></div><div>More problematic is Avis Budget's unwillingness to provide a reverse termination fee. As we have stated on several occasions, our Board accords substantial weight to the extent to which Avis Budget is willing to share the risk of the ultimate regulatory outcome. This is especially true where Avis Budget is unable to provide compelling objective evidence in favor of its antitrust position. Indeed, Avis Budget's unwillingness to offer a meaningful reverse termination fee can only represent to us, to the market and to any objective observer a lack of confidence by Avis Budget in its position. As you know, transaction certainty has consistently been a key criterion for Dollar Thrifty in evaluating possible transactions. We feel strongly that in order to merit favorable consideration by our Board, the relative magnitude of the reverse termination fee should be at least consistent with that of the Hertz transaction. Obviously, a fee of greater magnitude would demonstrate even greater confidence in your ability to procure antitrust approvals, as well as your willingness to take steps beyond your stated divestiture commitment to do so. </div><div><br /></div><div>Your advisors have suggested that there is a natural trade-off between the transaction consideration and deal certainty. Unfortunately, the "Superior Proposal" determination simply does not work in that way. Each of the three prongs must be met, and a higher price cannot compensate for a deficiency in deal certainty. But even if we could blend the factors as you suggest, Avis Budget's unwillingness to provide a reverse termination fee, coupled with your disinclination to provide analytical data supporting your antitrust position, leaves us incapable of making such an assessment."</div></blockquote><div></div><div>DTG's agreement with HTZ includes a reverse termination fee of $44.6 million if antitrust approval is not secured. CAR is not offering this fee, and DTG has expressed its disapproval. In hopes of addressing DTG's concern, CAR is willing to dispose of up to $250 million of revenue in the US and up to $325 million worldwide.</div><div><br /></div><div>When DTG and CAR iron out their differences (which we expect to happen), then DTG will be obligated to accept CAR's superior offer. That will leave the next move to HTZ. This is one of those deals where it’s great if you had already put on the <a href="http://www.merger-arbitrage-investing.com">risk arb spread</a> before CAR came around, but doing so now is dangerous. HTZ’s offer is about 19% below where DTG is currently trading and CAR’s bid carries a negative spread of roughly 5%. We would caution investors that the risk-reward of entering a position at these levels is unfavorable.</div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-79957860289104335212010-08-02T17:22:00.000-07:002010-08-02T17:24:43.738-07:00Risk Arbitrage: Hostile Offer for Casey’s General Stores Inc<div>We like to follow situations with many moving parts. While they get the job done, there’s really not much to some (a distinct minority) of the deals out there. A large private equity firm is buying a small box manufacturer. Say it’s a $200 million transaction. There’s no financing risk, it’s safe from a regulatory standpoint, valuation is fair, and it was decently shopped. Sure, we’re not against putting that in the portfolio (assuming we cannot fill it with better risk-reward scenarios), but that 2% spread we captured in three months is not the most didactic experience. Fortunately, there’s a current situation from which we can learn and also apply our knowledge. It involves an unsolicited bid, questionable strategy on the offensive side, and takeover defense tactics. Let's take a look at this <a href="http://www.merger-arbitrage-investing.com/">risk arbitrage situation.</a></div><div><br /></div><div>On April 9, Alimentation Couche-Tard Inc (ATD/B CN) announced that it submitted a proposal to acquire Casey's General Stores Inc (CASY) for $36/share in cash. CASY operates convenience stores in the Midwest. ATD is the largest independent convenience store operator in North America. The $1.9 billion offer was a 14% premium to CASY's April 8 closing price, and valued the company at 7.4x LTM EBITDA, or about $1.3 million per store. In the letter that ATD sent to the CASY board it was disclosed that "repeated efforts" to engage in deal discussions began in October 2009, and ATD said that if CASY continues to refuse negotiations, then they are prepared to commence a proxy contest to replace the board. CASY's share price closed at $39.10/share for a -8% spread.</div><div><br /></div><div>CASY, of course, again rejected the proposal, which it called "opportunistic". About a week after the unsolicited offer was made, CASY implemented a shareholder rights plan (poison pill) with a one-year expiration and a 15% threshold. Technically, this is a reinstatement of the pill, since it was adopted in 1989 and allowed to expire in 2009. ATD commenced a tender offer on June 2 and announced its intention to nominate a full slate (nine) of directors to the CASY. </div><div><br /></div><div>In early June, the Wall Street Journal brought to light that ATD had sold its entire 4% position in CASY for an average price of $38.43/share on April 9, the same day it made its $36/share offer, for a $13.9 million profit. Now, this is just in poor taste. If ATD thought that $36/share was a full price (the highest it will pay) for CASY, then it was ill-advised to come out with this as its first offer. As we've said before, agreements are never reached at the initial price of an unsolicited proposal. Since ATD has done transactions before, one can assume that they know the rules of the road. In short, it's bad deal etiquette, and likely to upset CASY. Sure enough, CASY filed suit on June 11 in the Southern District of Iowa, alleging that ATD manipulated the market and violated securities laws with its activity in CASY shares. ATD said that the lawsuit is entirely without merit and is designed to distract CASY shareholders from the real issue - ATD's "premium bid". A weak response, admittedly, but we'll let the courts determine that area.</div><div><br /></div><div>On June 28, ClearBridge Advisors (1.6% CASY stake) sent a letter to CASY urging them to engage in formal negotiations with ATD with respect to the $36/share offer. Anything less, ClearBridge argued, gives the impression that independence, not the maximization of shareholder value, is the board's highest priority. On July 12, ATD's tender offer was extended to August 6, after 19% of shares were tendered at $36/share. CASY responded "The low number of shares tendered reflects what Casey's has heard from many shareholders -- that this hostile, highly conditional offer is inadequate. The response of our shareholders to Couche-Tard's tender offer speaks for itself. We believe that our shareholders recognize Casey's industry-leading performance and superior value potential. The Casey's Board reiterates its recommendation that shareholders not tender their shares into the offer." CASY is a bit off with this comment, since a 19% acceptance rate for a low-ball bid is unusually high, but those who did tender likely did so as a referendum for an eventual deal, instead of approving the $36/share price.</div><div><br /></div><div>On July 22, ATD increased its offer from $36 to $36.75/share in another (the first being the sale of CASY shares after the offer was made) move that makes one wonder what ATD's thinking is on this deal. The increase is insignificant, as nothing under $40/share would be the basis for an agreement. If ATD is seeking to negotiate with CASY, as it publicly stated, then it has made shoddy attempts at doing so.</div><div><br /></div><div>On July 28, CASY announced that its board approved a $500 million recapitalization plan to be executed through a modified Dutch auction (self-tender offer) for a price of $38 to $40/share, to be funded by a combination of debt financing and available cash. CASY also rejected the $36.75/share offer from ATD, saying that the buyback of approximately 25% of its own shares is a better investment. CASY CEO, Robert Myers, said "the bottom line is that Casey’s shareholders will receive far more value from our accretive recapitalization plan and the substantial future upside of our growing company than through Couche-Tard’s inadequate, self-serving offer.”</div><div><br /></div><div>Make no mistake, the recapitalization is purely a takeover defense mechanism, and not done just because CASY saw an attractive investment opportunity. If it were done solely for the latter, why didn't CASY launch the recap at $33 to $34/share before the ATD offer when its stock was trading around $31/share? That would have been a much better investment. While it is possible that CASY remains independent, the recap does place a price floor on a buyout. If CASY is willing to buy a quarter of its shares for $40/each, then an outside party will certainly have to beat that figure if it wants acceptance from CASY holders.</div><div><br /></div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-3448614629112721692010-07-28T15:34:00.000-07:002010-07-28T15:35:59.810-07:00Risk Arbitrage - AmeriCredit (ACF)<div>The demise of General Motors has been a well-chronicled affair. GM completed a Chapter 11 reorganization in July of 2009, and after $49.5 billion of TARP investment, emerged with debt decreased from $95 to $17 billion. An IPO is planned for the near future. On July 22, GM announced the definitive agreement to acquire AmeriCredit Corp (ACF) for $24.50/share, or $3.5 billion in cash. Let's dig into this <a href="http://www.merger-arbitrage-investing.com">risk arbitrage opportunity</a>.</div><div><br /></div><div>ACF is a consumer finance company specializing in purchasing, securitizing and servicing automobile loans. The acquisition establishes the core of a new GM captive financing arm that will enable GM to provide customers with a more complete range of financing options. The transaction is expected to enhance dealer receptivity and improve sales penetration rates through coordinated GM branding and targeted customer marketing initiatives. ACF already has relationships with approximately 4,000 of the more than 11,000 GM dealers. </div><div><br /></div><div>At $24.50/share, ACF is valued at 9.3x LTM EBITDA, and a 24% premium to its previous close. While ACF was trading over $26/share in April, the takeout valuation is still a 25% premium to its closest peer. On the conference call to discuss the acquisition, GM CFO, Chris Liddell (former CFO of Microsoft), said that he expects no regulatory issues with the transaction. One would hope this is the case, since they had to have run this deal by the government before reaching the agreement, right? Well, when was asked on CNBC whether the government signed off on the deal, he said that while the government set up an independent board of directors, it was a company and board decision. He did say that the government was "notified" of the transaction before its announcement. Liddell said that the ACF deal will be funded with GM's cash balance, which exceeds $30 billion. As a 61% owner of GM, taxpayers might not think this is the best way for the cash to be used. One thing we have noticed is GM and ACF's use of the term "non-prime", in attempt to banish "sub-prime" from our lexicon. What else other than sub-prime could they mean by non-prime? Above-prime, perhaps? </div><div><br /></div><div>The transaction is subject to approval by ACF shareholders. Both Leucadia National and Fairholme Capital (two investors we highly respect) have executed voting agreements for their combined 43.6% ownership of ACF. The shareholder vote appears to be a nonissue. Funding in place, no regulatory issues, a sufficient valuation and a locked up shareholder vote usually equate to a tight spread. </div><div><br /></div><div>Congressional hearings on the wisest use of GM's cash are entirely possible. Indeed, Senator Chuck Grassley, ranking member of the Committee on Finance, sent a letter to the Special Inspector General of TARP, Neil Barofsky, the day the transaction was announced. Grassley said that "If GM has $3.5 billion in cash to buy a financial institution, it seems like it should have paid back taxpayers first. After GM’s experience with GMAC, which left GM seeking a taxpayer bailout, you have to think the company and, in turn, the taxpayers would be better off if GM focused on making cars that people want to buy and stayed clear of repeating its effort to make high-risk car loans.” What does this mean for this risk arbitrage situation? Simply put: This spread could be volatile over the next few months due to headline risk. We will keep our readers updated.</div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-24924341600898470472010-07-26T17:12:00.000-07:002010-07-26T17:14:11.733-07:00New Value Investing BlogHey guys - I have started a new <a href="http://www.schloss-value-investing.com/">Value Investing Blog</a> with heavy emphasis on <a href="http://www.schloss-value-investing.com/2010/07/walter-schloss-presentation-at-the-benjamin-graham-center-for-value-investing/">Walter Schloss</a> and other members of the Graham-Newman Corporation. Enjoy!Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-56336056228566019332010-07-22T04:04:00.000-07:002010-07-22T04:06:06.737-07:00Merger Arbitrage Investing Lesson: Strategic Reviews<div>While <a href="http://www.merger-arbitrage-investing.com/2010/07/risk-arbitrage-psychiatric-solutions.html">risk arbitrage</a> is concerned mainly with announced transactions with defined pricing considerations, a subset of the space deals with companies that are evaluating strategic alternatives. The result of this process could be a divestiture, a joint venture, a share buyback, or a sale of the company, among other things. Let's review a few outstanding situations of strategic reviews. </div><div><br /></div><div>A recent example of a strategic review culminating in a merger is Argon ST Inc (STST). In early January, STST announced that it retained advisors to explore strategic alternatives. In late June, STST agreed to be acquired by Boeing Co (BA) for $34.50/share, a 61% premium to the unaffected January 8 price. That transaction should close by the end of August. Even if you bought the shares after the announcement of the review, that's a 36% gain in 7 months. </div><div><br /></div><div>Novell Inc (NOVL) is a situation we have discussed previously. NOVL is different from the typical strategic review in that it has already received a takeover proposal. Elliott Associates proposed to acquire NOVL in early March for $5.75/share. On March 20, when the board formally rejected to unsolicited offer, a strategic alternative review was authorized. </div><div><br /></div><div>Media maven Robert Sillerman's CKX Inc (CKXE) is a company that is likely familiar to the event-driven community. Sillerman (who owns 21% of CKXE) has seemingly had some transaction proposal or another ongoing since 2007. In 2008, there was the buyout offer of $13.50/share that was revised to $12/share. The board accepted the lower bid, and in November, five months after the agreement, Sillerman terminated the deal due to market conditions at the time (remember the fourth quarter of 2008?). One Equity Partners was said to be near a deal with CKXE in March of this year, and Sillerman resigned from his post as chairman in May due to his own interest in pursuing a buyout of CKXE. So, while a formal evaluation process has not been announced, it's safe to say the company is ready to review proposals. </div><div><br /></div><div>California Pizza Kitchen Inc (CPKI) announced in mid-April that it is reviewing strategic alternatives. This company will surely be examined by financial sponsors, and it could also be sought by a strategic acquirer such as BJ's Restaurants Inc (BJRI) or Cheescake Factory Inc (CAKE). Recent restaurant transactions are the sale of Dave &amp; Busters by Wellspring Capital to Oak Hill Capital at 6.8x EBITDA and Arcapita Inc's sale of Cajun Operating Co to Friedman Fleischer &amp; Lowe at 7.0x. We recently covered the sale of CKE Restaurants Inc. </div><div><br /></div><div>A situation that appears to be slowing down is Polycom Inc (PLCM). It was reported in March that Apax Partners was discussing a buyout of PLCM after several months of negotiations. In mid-April, PLCM was said to have retained advisors to evaluate strategic alternatives. In late June, PLCM's CEO (who was promoted from VP of Global Operations a month earlier) said that they are not involved in any takeover discussions. Furthermore, in mid-July, the CEO reiterated that the focus of PLCM is to remain a standalone company. </div><div><br /></div><div>As the list of companies reviewing strategic alternatives changes, we will revisit this topic, especially how it relates to <a href="http://www.merger-arbitrage-investing.com">merger arbitrage investing</a>, in the future.</div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-20886475742096720812010-07-18T12:55:00.000-07:002010-07-18T12:57:46.372-07:00Risk Arbitrage: Psychiatric Solutions’ Deal and a SonicWALL Update<div>On March 10, the Wall Street Journal reported that Psychiatric Solutions Inc (PSYS) was in talks to be acquired by Bain Capital. A perfect <a href="http://www.merger-arbitrage-investing.com">example of risk arbitrage</a>. PSYS offers behavioral health programs to critically ill patients. The company owns and operates freestanding psychiatric inpatient hospitals and manages psychiatric units within general acute care hospitals owned by others. The article said that CCMP Capital, and KKR looked at the business but eventually passed. Blackstone considered merging PSYS into its hospital chain, Vanguard Health Systems, and decided not to pursue the transaction. Bain was said to be the most likely buyer, which reminded investors of the $21 billion buyout of HCA Inc in 2006 where Bain teamed up with KKR. Two and half hours after the WSJ's announcement, PSYS put out a statement saying that it "has been approached by third parties in connection with a potential acquisition". The stock closed at $29/share, up 21% for the day.</div><div><br /></div><div>In mid-April, Universal Health Services Inc (UHS) was said to have retained advisors to explore an acquisition of PSYS. Joey Jacobs, the CEO of PSYS, was said to prefer a deal with Bain, since he would likely remain in his position with the private equity buyer. A strategic acquirer could deem his services redundant. On April 20, PSYS disclosed that the employment agreement for Joey Jacobs was amended to provide in a change in control (resulting in his voluntary or involuntary separation from PSYS) a lump sum of: Jacobs' earned but unpaid base salary through the termination date; three times his base salary plus an amount equal to his highest bonus in the last three years, and many other payments, including a full vesting of his stock options to comprise his golden parachute. Indeed, it appeared that the CEO was preparing for a takeover, and Jacobs was not taking any chances on his dismissal.</div><div><br /></div><div>On May 17, UHS announced a definitive agreement to acquire PSYS for $33.75/share in cash, or $3.1 billion. The transaction has fully committed debt financing and is expected to be completed in the fourth quarter of 2010. Our first thought on this announcement is valuation. The takeout price assigns a 9.5x 2010 EBITDA multiple to PSYS, while its best comps were trading at about 6.5x when the merger was announced. Next, we want to know if PSYS was properly shopped to other potential buyers, which from all reports, it was. This mitigates the lack of a go-shop provision. However, we will know the details of the bidding process when the preliminary proxy is released. As for the premium for the takeout price, we must look at the unaffected share price, which is March 9, before the initial deal reports. This represents a healthy 41%.</div><div><br /></div><div>Another area in need of evaluation is the antitrust risk of the acquisition. Strategic transactions generally require more regulatory scrutiny than those involving financial sponsors, simply because the former is more likely to have existing assets in the particular market segments. As we've discussed, two bodies review antitrust risk in the United States: the Department of Justice and the Federal Trade Commission. Each tends to specialize in certain areas, and historically, the FTC has reviewed hospital mergers. The review focuses on the combined effect of the companies and their ability to impact pricing. The companies have regional overlaps in facilities in areas such as southern California and certain east coast regions. Divestitures here will be required, and we can expect a review longer than the initial 30-day waiting period. </div><div><br /></div><div>Speaking at the Wells Fargo Healthcare Conference, UHS said on June 23 that they have discussed the merger with the FTC staff and possible divestitures from the combination. UHS said it was confident that any required asset sales would not preclude the transaction from being accretive. This is what arbs like to hear, especially, from the acquirer. Of course the target is going to paint a rosy picture of things - they want to be bought. Especially if things become complicated, targets will maintain the stated benefits of the deal. It is the party writing the check from whom you want to hear positive statements.</div><div><br /></div><div>On July 2, the release of the preliminary proxy confirmed our belief that an extended antitrust review will take place. The filing stated that "The initial HSR Act 30-day waiting period was set to expire on June 28, 2010. After discussions with the FTC, UHS withdrew its notification and report form effective as of June 25, 2010, and refiled on June 28, 2010. Refiling restarted the initial HSR Act 30-day waiting period. That HSR Act waiting period will expire at 11:59 p.m., Eastern Time, on July 28, 2010, unless earlier terminated or extended." As we've explained before, a voluntary refiling is preferred over a full Second Request. It would not be surprising to see UHS pull and refile again if it is not confident that the FTC will clear the transaction within the waiting period. That would reset the clock again. While an extended review is evident, this transaction should secure regulatory clearance. UHS appears committed to making the proper divestitures, which should allay the concerns of the FTC. Regarding the background section, the preliminary proxy revealed that a separate bidding party involving private equity firms offered as much as $33/share on May 16. So, not only did other parties review PSYS and not bid, but several parties were in the bidding process right until the end.</div><div><br /></div><div>Now, let's update the SonicWALL Inc (SNWLL) deal we discussed previously. On July 6, SNWL announced that the unsolicited third party strategic bidder who offered $12/share informed SNWL that it no longer intends to pursue the acquisition. The SNWL board continues to recommend that shareholders approve the acquisition by Thoma Bravo and Ontario Teachers on July 23. The reasoning behind this move has not been disclosed, but we know that Thoma Bravo is pleased it is not forced into a position where it has to raise its offer. Stay tuned as we continue our in depth<a href="http://www.merger-arbitrage-investing.com"> risk arbitrage analysis</a> of these two transactions.</div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-58492296905996238572010-07-15T19:48:00.000-07:002010-07-15T19:55:29.340-07:00Merger Arb Spreads July 2010Every few weeks, I am going to update this table of <a href="http://www.merger-arbitrage-investing.com/">merger arb spreads</a> below:<div><br /></div><div><a href="http://2.bp.blogspot.com/_gtR4KkpmjKs/TD_IzsiWBfI/AAAAAAAAANc/OfmPIlwrQaA/s1600/Merger+Arb+Spreads+2010.JPG"><img src="http://2.bp.blogspot.com/_gtR4KkpmjKs/TD_IzsiWBfI/AAAAAAAAANc/OfmPIlwrQaA/s400/Merger+Arb+Spreads+2010.JPG" border="0" alt="" id="BLOGGER_PHOTO_ID_5494330860869387762" style="cursor: pointer; width: 326px; height: 400px; " /></a></div><div><br /></div><div>If you cannot read it (you probably can't), click on the image. Here is how to read the chart: Going from left to right, in terms of columns:</div><div><ol><li>Target</li><li>Acquirer</li><li>Consideration, in acquirer shares, to target shareholders</li><li>Consideration, in cash, to target shareholders</li><li>Current Acquirer stock price</li><li>Current Target stock price</li><li>Total Consideration = (3*5) + 4</li><li>Dollar Premium = 7 - 6</li><li>Percent Premium = 8/6</li><li>Annualized Premium = 9 * (365 / (# of days until estimated completion)</li></ol><div>Note, the dates are really the fuzzy math of this chart - Sometime a press release will say: "Estimated completion in the fourth quarter" ... and from there we use judgement. When no indication of timing is given, I have put TBD.</div></div><div><br /></div><div>I have enabled comments for this post so would love to hear what I can add, change, got wrong on our first presentation of merger arb spreads.</div><div><br /></div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-10488056475510836352010-06-30T19:56:00.000-07:002010-06-30T19:58:27.988-07:00Merger Arbitrage: SonicWALL Inc (SNWL)<div>On June 2, SonicWALL Inc (SNWL) announced a definitive agreement to be acquired by an investor group led by Thoma Bravo, LLC and including Ontario Teachers' Pension Plan for $11.50/share, or about $720 million. SNWL is a leading provider of IT security and data backup and recovery solutions. The offer price represented a 28% premium to SNWL's previous closing price. SNWL expects the transaction to close in the fiscal quarter ending September 30 or early in the fiscal quarter ending December 31. The press release did not contain any more information, nor was there a conference call. Let's dig into this <a href="http://www.merger-arbitrage-investing.com/">merger arbitrage situation</a>.</div><div><br /></div><div>Some people might be thinking, "great, a 28% premium from legitimate buyers", however there are warning signs that should be evident after reading the 8:30pm announcement. We have mentioned the first two issues several times on this blog. The first is that there is no go-shop period, which would allow SNWL to solicit bids from third parties for a specified time period, typically 30 days. These provisions are typical with private equity buyers. The second issue is that there is no voting agreement with shareholders. Or, shall we say, there was no announcement of any go-shop period or voting agreement. Since these are viewed favorably to shareholders of target companies, and management will go out of its way to display any shareholder friendly actions performed, we assume that lack of disclosure means that these items do not exist. We learn at 6am the following morning in a filing that there is a voting agreement, albeit for the 1% of shares that management and the board own. This is unconvincing, given that page one holders represent 64% of the shares outstanding.</div><div><br /></div><div>These are nice ancillary points, one could say, but how about something more substantive? Okay, let's look at valuation. At $11.50/share, SNWL is valued at about 2.0x LTM revenues. SNWL's comps trade at a multiple of about 2.2x. All things being equal, which they admittedly never are, the takeout multiple should be higher than where the peers trade. The main reason is that shareholders must be enticed with a control premium.</div><div><br /></div><div>For some background on Thoma Bravo, the private equity firm agreed to acquire Entrust Inc on April 13, 2009 for $1.85/share, or $114 million. The transaction contained a 30-day go-shop provision. Thoma Bravo was able to secure a voting agreement with 19% of Entrust shares. When the go-shop period expired on May 13, Entrust provided an update on what transpired in the process. After speaking with 35 separate parties, Entrust received written, non-binding indications of interest from three parties, each of which contemplated a price higher than the $1.85/share deal with Thoma Bravo. As a result, Entrust intended to provide additional due diligence and continue discussions and negotiations with these parties. Notwithstanding the foregoing, Entrust reiterated that its board determined that the merger with Thoma Bravo is fair and that they still recommend shareholder approval of the deal. On June 11, Entrust director Douglas Schloss (who runs the risk arb fund Rexford Management) publicly stated how the timing is poor to be selling the firm and that the offer price should be increased. Schloss was one of the two directors out of the nine-person board who voted against the $1.85/share deal. On July 10, Thoma Bravo amended its merger agreement with Entrust for an acquisition price of $2/share, or $124 million. The deal closed on July 28.</div><div><br /></div><div>Now let’s return to the SNWL deal. On June 11, we learn from the preliminary proxy that three parties outside of the buying consortium entered confidentiality agreements with SNWL, though no offers were made. This does not support management's decision not to negotiate a go-shop provision, since clearly there were other interested parties. Surprisingly, this did not tighten the spread, as it remained at 2.4% after this news. The release of the definitive proxy on June 22 set the shareholder vote for July 23. It also disclosed that regulatory clearance from the FTC had been granted. The most important piece of information in the filing was added to the end of the background section, acting as the latest update. This is the section where one can learn about other conversations the company had about a transaction. Often there is nothing material (no big change in the background section from the preliminary to the definitive), though in this case, there is an important addendum:</div><blockquote><div>On June 16, 2010, the board of directors of SonicWALL, Inc. received an unsolicited non-binding proposal from Strategic Party D, a privately held competitor, in which such party proposed, subject to completion of due diligence and finalization of definitive documentation, to acquire the outstanding shares of common stock of SonicWALL for $12.00 per share in cash. Strategic Party D’s offer identifies Financial Sponsor C and Financial Sponsor D as expected equity financing sources for its proposal and states that it is in discussions with debt financing sources. </div><div><br /></div><div>On June 18, 2010, the board of directors of SonicWALL, after consultation with its financial and legal advisors, determined that the unsolicited non-binding proposal from Strategic Party D meets the criteria required by Section 5.6(b) of the Merger Agreement to permit the Company to provide information to, and negotiate with, Strategic Party D in accordance with its terms. Based on this determination and as permitted by the Merger Agreement, SonicWALL delivered a confidentiality agreement with a standstill provision to Strategic Party D and its proposed equity financing sources as provided for in the Merger Agreement and, upon its execution, will furnish information to Strategic Party D and enter into discussions with it regarding its proposal. </div><div><br /></div><div>The board of directors of SonicWALL has not approved, adopted or recommended the acquisition proposal from Strategic Party D or declared it superior to the Merger Agreement and the merger. Moreover, SonicWALL’s board of directors has not withdrawn, qualified, or modified its recommendation that SonicWALL shareholders approve the principal terms of the Merger Agreement, the merger and the Agreement of Merger. Our board of directors continues to recommend that you vote “FOR” the proposal to approve the principal terms of the Merger Agreement, the merger and the Agreement of Merger. There is no assurance that negotiations with Strategic Party D will ultimately lead to a superior proposal, that SonicWALL and Strategic Party D will reach final agreement on terms regarding the acquisition of SonicWALL by Strategic Party D or that, if the parties do enter into such an agreement, regulatory approvals and other conditions to completing such a transaction will be obtained.</div></blockquote><div></div><div>Knowing about Entrust, we are aware that Thoma Bravo has been in a similar situation. We also know that the result was an increase in the purchase price. The spread closed on June 22 at -3.0% after disclosure of this bidder. As of June 29, it is -1.5%, as investors are still very interested in the potential spoiler bid. </div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-53649980277700576522010-06-27T15:55:00.001-07:002010-06-27T16:09:28.628-07:00Risk Arbitrage - An Investor's Guide: Chapter 3A few months ago, we began to summarize Keith Moore's fantastic book: <a href="http://www.amazon.com/gp/product/0471248843?ie=UTF8&amp;tag=amildolonthew-20&amp;linkCode=as2&amp;camp=1789&amp;creative=9325&amp;creativeASIN=0471248843">Risk Arbitrage - An Investor's Guide</a>. We continue this series here at <a href="http://www.merger-arbitrage-investing.com">Merger Arbitrage Investing</a> with chapters 3 and 4. <div><br /></div><div>In Chapter 3, Moore talks about the risk arbitrage industry. He points out that in the 1970s, only 10 or 15 firms were involved in risk arbitrage. These organizations were generally arb departments in sell side firms. With the growth in hedge funds, via limited partnerships, the growth of merger arb participants exploded. Moore also points out that pension funds have become larger players in the past decade. </div><div><br /></div><div>In spite of this, Moore points out that returns in the risk arbitrage business remain attractive. Supporting this - MERFX, the Merger Fund, has had a 5 year return of 4.15% versus the S&amp;P which has been essentially flat over the same period. In addition, using the MARB function on Bloomberg, one can see over 100 deals in the merger arbitrage universe.</div><div><br /></div><div>Later in the week, we will review Risk Arbitrage's chapter 4, which I think is the most important chapter in the book.</div><div><br /></div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-15839207663960821802010-06-22T20:51:00.000-07:002010-06-22T20:52:48.090-07:00Risk Arbitrage: Charles River’s Acquisition of WuXi PharmaTech<div>This post will review a merger arbitrage situation with an extremely wide spread. For the same reasons stock prices fall, spreads widen on an increase in the perceived risk of a transaction, or investors simply don’t believe that management’s original plan for the deal will actually be realized. Charles River Laboratories’ (CRL) acquisition of WuXi PharmaTech Inc (WX) is currently facing opposition from CRL shareholders, which has forced the spread to 31.3% as of June 17.</div><div><br /></div><div>WX is a drug research and development outsourcing company with expertise in discovery chemistry and with operations in China and the US. CRL is a global provider of research models and associated services and of preclinical drug development services.</div><div><br /></div><div>On April 26, WX announced a definitive agreement to be acquired by CRL for $1.6 billion, consisting of $11.25/share in cash and $10/share in CRL common stock (to be determined by an exchange ratio with a collar). The ratio will be determined by dividing $10.00 by the weighted average of CRL’s closing price for the 20-day period ending the second business day prior to the closing. (For those new to arb, these “pricing periods” are standard for undetermined exchange ratios.) If CRL’s average price is greater than or equal to $43.17/share, then the exchange ratio will be fixed at 0.2316, and if CRL’s average price is less than or equal to $37.15/share, then the exchange ratio will be fixed at 0.2692. The companies anticipate closing the merger by the fourth quarter. CRL intends to finance the cash portion of the transaction through balance sheet cash on hand and its $1.25 billion financing commitment from JP Morgan and Bank of America Merrill Lynch. </div><div><br /></div><div>During the conference call that CRL hosted later that morning, management stated that they were the only party which conducted discussions with WX about a merger. This can have both positive and negative implications, though mostly the latter. Shareholders of the target like to hear this because it could mean that the absence of a competitive bidding process equates to a lower purchase price. The flip side of that could be that they offered so high a price that the board of the target did not deem a market check for outside interest necessary. Conversely, when shareholders of the target hear that the acquirer was the only party with whom the board negotiated then they are want to cry foul. Indeed, it is the board’s fiduciary responsibility to extract the greatest value for shareholders in a sale process. The gross spread was 9.5% the day of announcement. </div><div><br /></div><div>The merger agreement was released the evening of the deal announcement and it provided a glimpse into the confidence that CRL had in securing approval from its shareholders. The termination fee is $50 million, the reverse termination fee is $50 million (payable if CRL decides to terminate), and there is a $25 million fee if CRL shareholders fail to approve the acquisition. It’s the last fee that grabs our attention. This tells us that not only was CRL concerned with whether its shareholders would approve the acquisition, but it went so far as to include an out (at half the price) in the agreement if they do not. Logically, this is because they either ran the purchase by their top shareholders before the announcement and were unsure of their support, or they did not survey the top holders (perhaps because they knew it would be unwelcome) and were just hedging themselves. </div><div><br /></div><div>Sure enough, on June 7, Barry Rosenstein’s JANA Partners (an investor we respect, and CRL’s largest shareholder at 7.0%) sent a letter to CRL’s chairman and CEO, James Foster. JANA said that they “have serious doubts about the wisdom of pursuing this transaction at this time. Even if the contemplated benefits can ultimately be realized, we believe that the high cost, significant integration risks and inopportune timing simply make the proposed acquisition the wrong path for Charles River shareholders. For these reasons, we intend to vote against the issuance of Company stock required to complete the proposed acquisition, and we believe based on shareholder sentiment it is likely that a majority of the Company's shareholders will do the same.” JANA cited that the 16x consensus 2010 EBITDA estimate valuation assigned to WX compared to 8x for CRL at the time of the announcement cannot be justified with WX’s declining margins and falling growth rates. JANA’s letter widened the spread to 28.1%. </div><div><br /></div><div>On June 14, Foster responded to JANA’s letter and said he is “convinced that this combination will create meaningful additional value” for CRL shareholders. Foster believes that applying pre-tax EBITDA multiples is misleading given WX’s significantly lower effective tax rate than CRL. He further recommends that investors consider (when factoring in WX’s significantly higher expected EPS growth rate) the purchase price representing a 1.4x PEG, in-line with CRL’s own valuation. Foster said on June 15 that he has met with all of his largest shareholders and that the majority of them are agreeable to the acquisition of WX. </div><div><br /></div><div>JANA fired off another letter to CRL on June 16 and cited one analyst who said that 35% of CRL shareholders already oppose the acquisition of WX. On June 17, Neuberger Berman, a 6.3% holder of CRL, joined in on the fun and said that acquisition is not in the best interests of shareholders. Neuberger correctly pointed out that CRL “needs to demonstrate that the current assets can generate returns well in excess of its cost of capital before being allowed to spend $1.6 billion of capital”. </div><div><br /></div><div>The increasing shareholder opposition on CRL’s side is a severe hurdle to deal completion. Much of the criticism of the merger is well-founded. CRL has two choices: Press ahead with the deal or terminate before shareholders vote down the agreement. Terminating before the vote would save face, and show that the board is receptive to the concerns of a sophisticated shareholder base. However, they would save $25 million if they let the vote take place even while knowing it will be unsuccessful. This is the more likely route they will take.</div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-63176665896168114662010-06-14T18:43:00.000-07:002010-06-14T18:47:08.077-07:00Merger Arbitrage: Javelin Pharmaceuticals<div>Similar to other areas of investing, following <a href="http://www.merger-arbitrage-investing.com">arbitrage deals</a> helps you construct a historical framework from which to build your analysis. For instance, some deals are beneficial from an antitrust perspective. Some provide insight into M&amp;A law. Other deals are good references for analyzing deals with multiple bidders. For Javelin Pharmaceuticals Inc (JAV), we have the latter two aspects. Using Bloomberg’s description, JAV is a specialty pharmaceutical company that develops drugs to treat intense moderate-to-sever pain. </div><div><br /></div><div>On December 18, 2009, JAV agreed to be acquired by Myriad Pharmaceuticals Inc (MYRX) for a stock exchange of 0.282 MYRX shares per JAV share. The ratio valued JAV at $1.50/share, a 22% premium to its previous close. MYRX agreed to place 4% of shares in the combined company in escrow to be delivered to the pre-merger shareholders of JAV, depending on the timing of FDA approval of JAV’s Dyloject, a post-operative pain management drug. If approved by June 30, 2010 the ratio would be 0.3311, if by January 31, 2011 the ratio would be 0.3066, and 0.2943 if approved by June 30, 2011. MYRX also agreed to provide up to $6 million of interim financing to fund JAV’s operating activities prior to closing, which was expected to occur during the first quarter of 2010. </div><div><br /></div><div>The preliminary proxy’s background section revealed on February 12 that there was outside interest in JAV. An unnamed European pharmaceutical company gave a preliminary indication of interest on August 6, 2009 of a stock exchange worth $2.20/share. A separate company offered a stock exchange work $2/share on August 7, which was revised to a $2.47/share value on August 30. Another company sent a letter of interest for $1.85 to $2/share in cash on December 10. JAV rejected this offer due to its lack of a working capital facility and because it was subject to further due diligence. </div><div><br /></div><div>Millennium Management, a 7% JAV holder, disclosed in a 13D on March 3 that the proposed merger with MYRX does not maximize shareholder value, and cited the higher valuations from other parties in the sale process. The spread went from -4% to -7% on Millennium’s opposition. </div><div><br /></div><div>On April 12, JAV announced that it had received a binding offer from Hospira Inc (HSP) to be acquired in a cash tender offer for $2.20/share. In addition, HSP would provide JAV a working capital facility under which JAV may borrow up to $4.5 million to fund operating activities prior to closing a merger, $8.3 million for JAV’s repayment of the principal and accrued interest incurred under a similar arrangement entered into with MYRX, and $4.4 million for payment of the termination fee to MYRX. JAV’s board said that if MYRX does not favorably adjust the terms of its offer within a five business day good faith negotiating period, then they expect to enter the merger and loan agreements with HSP. JAV closed at $2.15/share the day of this announcement, a 60% increase from the previous close. MYRX also rose 10%. </div><div><br /></div><div>On April 19, JAV terminated the merger with MYRX, and later that day signed an agreement with HSP for $2.20/share, or $145 million. HSP said it pursued the deal to take advantage of synergies between JAV’s main product candidate, Dyloject. </div><div><br /></div><div>As a side note, we see two similarities with the offers. One is that both provide short-term financing. This tells us that JAV is in a bit of a cash crunch. The second thing we notice is that both deals rely on Dyloject, so it is clearly important to JAV. </div><div><br /></div><div>On May 19, HSP extended its tender offer to June 2, after 79% of shares were tendered. HSP extended the offer “based on its determination that all of the conditions to the offer had not been satisfied”. Normally one would think that the condition not satisfied is the minimum number of shares required, but four minutes later JAV released the following:</div><div><br /></div><div></div><blockquote><div>Javelin believes that, in asserting the failure to satisfy in full any such conditions, Hospira is purporting to rely on information regarding a supply chain issue in the United Kingdom described below.</div><div><br /></div><div>Javelin was notified, on May 14, 2010 by a licensee of commercial rights to Dyloject in the European Union, that an issue has arisen in the UK Dyloject supply chain. Javelin notified Hospira of this matter promptly after being informed. Javelin is not aware of any issue in its supply chain for Dyloject in the United States.</div><div><br /></div><div>Javelin disagrees with Hospira's position under the merger agreement that the conditions to the tender offer have not been fully satisfied and believes that all of the conditions of the tender offer have been satisfied. Javelin continues to honor its obligations under the terms of the merger agreement.</div></blockquote><div></div><div><br /></div><div>Wait a minute. That changes things. Remember how we mentioned Dyloject, and how both bidders found it to be an integral part of their strategy to acquire JAV? It’s certainly not a good thing when “an issue has arisen” with this product. JAV closed down 17% for the day. </div><div><br /></div><div>On May 24, JAV finally clarified the European “issue”.</div><div><br /></div><div></div><blockquote><div>Therabel Pharma UK Limited ("Therabel"), a subsidiary of Therabel Pharma N.V. and Javelin's licensee of commercial rights to Dyloject™ (diclofenac sodium) in the European Union recently informed Javelin and publicly announced that it is withdrawing all batches of Dyloject (diclofenac 75mg/2ml) from the UK market with a Drug Alert Class 2 Medicines Recall.</div><div><br /></div><div>Therabel reported that it became aware of the presence of a white particulate matter in some vials of Dyloject in its supply chain. These findings were promptly reported to The Defective Medicines Reporting Centre (DMRC) of The Medicines and Healthcare Products Regulatory Agency (MHRA) in accordance with standard procedures.</div><div><br /></div><div>Therabel further reported that its review of pharmacovigilance information does not appear to indicate any detected patient safety concerns linked to the particulate matter found in some vials. Dyloject has been marketed in the UK since December of 2007.</div><div><br /></div><div>Therabel has indicated that it is cooperating fully with the MHRA and is active in an investigation to resolve this matter and to restore the supply of Dyloject to the UK market as soon as possible. Javelin is providing assistance to Therabel with its investigation.</div></blockquote><div></div><div><br /></div><div>JAV closed down another 30% at $1.26/share on May 24, leaving the gross spread at 74%. The spread remained wide as investors were seeking to determine what HSP would do next. Would it continue with the transaction? Would it attempt to invoke a MAC?</div><div><br /></div><div>The next move was made by JAV, when on June 3 it filed suit against HSP in the Delaware Court of Chancery. The suit seeks to compel HSP to complete the merger and also asks for expedited proceedings to allow for an early trial. The complaint contends that HSP breached the merger agreement by failing to accept and pay for the 79% of shares that were tendered through May 18 and by failing to complete the merger. Additionally, the complaint asserts that HSP breached the terms of the loan agreement under which HSP was obligated to $2 million on June 1.</div><div><br /></div><div>HSP extended the tender offer on June 3 to June 16. The acquirer was careful to add that it “intends to continue to work with Javelin to confirm the satisfaction of the conditions to the offer as promptly as practicable”. In a letter to JAV’s CEO, HSP’s general counsel said that HSP “believes that the occurrence of the particulate issue, which directly affects the Company’s sole viable drug product, would reasonably be expected to result in a Material Adverse Effect, as defined in the Merger Agreement”.</div><div><br /></div><div>The Court granted the motion to expedite on June 4. Later that day, JAV received notice from the NYSE staff that it is not in compliance with the NYSE Company Guide. Specifically, the staff indicated that JAV has “sustained losses which are so substantial in relation to its overall operation or its existing financial resources, or its financial condition has become so impaired that it appears questionable, in the opinion of the Exchange, as to whether Javelin will be able to continue operations and/or meet its obligations as they mature”. JAV announced on June 11 that HSP funded at $2 million loan under the existing loan agreement.</div><div><br /></div><div>This is a very risky transaction to play right now, though the monster spread might be attractive to some people. The most likely outcome is this deal is terminated. Invoking a MAC in Delaware has proven to be a difficult task. It’s obvious why JAV wants an expedited trial – it is running out of money. The timeframe provided by the courts might not be fast enough for the company.</div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-48429479194317698042010-05-16T19:42:00.000-07:002010-05-16T19:44:34.097-07:00Risk Arbitrage: CKE Restaurants: Is a Higher Offer Coming?<div>CKE Restaurants Inc (CKR) is an interesting <a href="http://www.merger-arbitrage-investing.com/">risk arb situation</a> that we are currently following. It first agreed to be acquired by Thomas H. Lee Partners for $11.05/share, then it terminated that deal to accept an offer from Apollo Management for $12.55/share. While the remaining spread is $0.11 (0.9%), there is some optionality on the name that investors might find attractive. </div><div><br /></div><div>On February 26, 2010, CKR announced a definitive agreement to be acquired by THL for $11.05/share in cash, a $928 million price tag. The price was a 24% premium to CKR’s prior close, and valued the company at about 5.5x EBITDA. The agreement contained a go-shop provision which allowed CKR to solicit third party proposals until April 6. During the go-shop period, CKR closed as high as $11.56/share (-4.4%) as investors anticipated a higher offer. Reports were that Wendy’s/Arby’s Group (WEN) and other private equity firms were evaluating a bid and looking at CKR’s books. Let's delve a little deeper into this risk arb situation.</div><div><br /></div><div>CKR disclosed on April 7 that it received an alternative takeover proposal which was reasonably expected to lead to a superior proposal. No terms were disclosed, but CKR said that it will engage the party in further negotiations until April 27. When this news came out, the stock went to $11.81/share (-6.4% spread). As things usually go in arb land, everyone knew it was Apollo who made the bid, though it had not been officially stated. On April 20, CKR announced that the party offered $12.55/share, which the board deemed a superior proposal. The new proposal, which valued CKR at 6.3x EBITDA, had an expiration date of April 24. On April 26, CKR announced that it terminated the THL agreement and entered a new merger agreement with Apollo for $12.55/share. </div><div><br /></div><div>So this tells us that THL was not interested in matching Apollo’s offer, since a match from a party with whom you are already in a definitive agreement is preferable, so the company can avoid paying the termination fee. However, this turned out not to be the case. CKR disclosed in the deal background section of its preliminary proxy on May 4 that THL actually did match the $12.55/share offer. The revised THL offer, made on April 23, included a provision whereby CKR would be obligated to pay a termination fee of $29 million in the event that a new merger agreement was executed with Apollo, and a $15 million fee for all other buyers. THL also wanted a two business day match right. Later that day, CKR’s advisors, UBS, made three suggestions as to how THL could improve its latest offer: 1) increase the per share consideration 2) eliminate the two business day match right and 3) make the termination fee applicable to Apollo equal to the fee for other potential bidders. THL declined to negotiate these terms and stuck with their proposal. </div><div><br /></div><div>Here’s where it could become interesting. Also included in the proxy was that CKR requested wire instructions from THL on April 22 in order to prepare the wire transfer of the $9 million termination fee payable to THL. Subsequent requests were made, but THL had not provided the instructions by the May 4 proxy. This seems odd to those versed in M&amp;A. When a company announces that a transaction has been terminated, it usually includes in the same press release that the termination fee has been paid (or will be paid imminently). Why is THL delaying the receipt of the termination fee? Perhaps they are preparing to make another offer. Let’s imagine that THL is planning to make an offer that it believes will win CKR. In this scenario, the payment of the termination fee is irrelevant, since THL would own CKR. Why transfer the cash from a target to its eventual owner if the owner will appropriate the assets upon deal completion (which should happen in the second quarter)? We already know THL was willing to pay $12.55/share. </div><div>There is your option on CKR. The stock is at $12.44, with a 7% spread annualized to June 30. Not an eye-popping number, but it’s a relatively safe deal, and you could potentially see an increase in the deal price. Remember, the role of <a href="http://www.merger-arbitrage-investing.com/">merger arbitrage investing</a> is to provide non-correlated, attractive risk-adjusted returns. This transaction is a sufficient example.</div>Hunternoreply@blogger.com0tag:blogger.com,1999:blog-1734454871722284731.post-66592171213882149702010-05-10T21:21:00.000-07:002010-05-10T21:23:51.853-07:00Recent Merger Arbitrage Opportunities<div>One of the aspects of <a href="http://www.merger-arbitrage-investing.com">merger arbitrage investing</a> that we find appealing is how you have to be a generalist. Deals happen in all industries, and arbs are not precluded from following a company because of the nature of its business. Indeed, the ingress and egress of names under our purview requires proficiency in a broad range of subjects. In the last few weeks we’ve seen deals involving Qwest Communications, Interactive Data, Continental Airlines, Dollar Thrifty Automotive, inVentive Health, CyberSource, WuXi Pharmatech, Stanley Inc, and Palm, among others. As far as closings, investors can no longer follow BJ Services, Switch &amp; Data Facilities, Terra Industries, 3Com, and Facet Biotech. </div><div><br /></div><div>You can find an event analyst immersed in hydraulic fracturing one day, studying the likelihood of any possible legislation that could come about (and potentially derail the XTO Energy – Exxon Mobil merger). The next day the same analyst could evaluate the competitive impact of combining an internet payment gateway provider with a payment network (for antitrust issues in the CyberSource – Visa deal). </div><div><br /></div><div>A recent trend we’ve noticed is that financial sponsors (private equity) have been more active lately. Thomas H. Lee Partners announced the buyout of inventive Health on May 6 for $1.1 billion. Warburg Pincus and Silver Lake reached a $3.4 billion deal for Interactive Data on May 4. It is being said that Blackstone, THL, and TPG are in talks to acquire Fidelity National Information Services for around $13 billion. That would be the largest LBO in nearly three years. A merger revival appears to be in the making. Even the inimitable Jimmy Lee of JP Morgan sees a deal boom on the horizon. </div><div><br /></div><div>We are also watching a few companies who are “reviewing strategic alternatives” which very often leads to a transaction. We are welcoming the increased activity on our desk. Hopefully spreads will widen to attractive levels in the near future, since the risk-reward for many situations does not warrant a portfolio position. Given how merger arbitrage spreads have collapsed over the past 5-10 years, we hope that a more healthy supply of deals will soak up capital more effectively and possibly give us some "fat pitches" to generate sizeable risk adjusted returns.</div>Hunternoreply@blogger.com0