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Aecon Arb oppprtunity


longlake95
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Oh yes - lots of Chinese deals gone south! However, CCCI are the real deal. The have a track record of buying North American construction companies - like Fried & Goldman in Texas. Which by all accounts has been a success. I still need to dig some more, and in the meantime, the excitement may subside and provide a greater spread.

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4% is way too small a spread unless you are a merger arb hedge fund.

 

In general I disagree. Plenty of deals I'd love to buy at 4%. However, in this case a Chinese state-owned company is trying to buy the largest public Canadian infrastructure company, one that knows how to build and maintain nuclear reactors. Regulators will take a hard look. Tough to handicap.

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4% is way too small a spread unless you are a merger arb hedge fund.

 

In general I disagree. Plenty of deals I'd love to buy at 4%. However, in this case a Chinese state-owned company is trying to buy the largest public Canadian infrastructure company, one that knows how to build and maintain nuclear reactors. Regulators will take a hard look. Tough to handicap.

 

I'm curious as to how you would size such deals?

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Usually I am invested in several deals at once, each with a 2%-5% allocation. I personally like to diversify. There is no silver bullet as far as I know.. I guess it depends on how you perceive upside, downside, deal risk and estimated time to completion. For example, a few weeks ago Unilever announced they were retiring their preference shares. Deal was brokered with the largest holder, deal size was very small for Unilever, they expected to complete the deal by year-end and I didn't see any regulatory problems. There was some selling pressure as shares surged ~200% because of the announcement. Preference shares were very illiquid but I managed to build an ~8% position at a ~4% spread. Excellent risk-adjusted IRR as far as I am concerned and I wouldn't have minded to own a bit more.

 

Sometimes microcap deals trade at largish (~4% - ~8%) spreads shortly before completion because of a combination of illiquidity, a lack of information, deal complexity and/or a significant rise following the announcement and because these deals are too small for almost everybody expect for PA's. Questar was an example of such a deal earlier this year and at some point a ~13% position for me. In 2016 Kahala and Glacier Water were similar deals in which I held even larger positions. In 2015 Safeway was, due to deal structure, imho a no-brainer large-cap deal in which I invested 25% of my funds because I didn't have the balls to go bigger.

 

In general, I like illiquidity, a lack of information and/or some uncertainty about the payout because these are risks I am willing to bear and other investors often can't or won't. I don't like regulatory risks as the only way I have to handicap these is a 'common sense' approach. I.e. in this case I think authorities aren't gonna give up easily a company building nuclear reactors, airports and the Vancouver Sky Train to a Chinese bidder. But other investors might be much better 'in the know' about what regulators think so I am not sure whether this is mispriced or not.

 

However, if the spread is large enough I sometimes give it a try. CAB was an example earlier this year where I didn't see why regulators would block the deal. Still I only bought a very small position (<2%). I currently own a few shares of BRCD, similar situation.

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  • 3 months later...

http://www.aecon.com/Media_Room/~1417-Aecon-Announces-Extension-of-the-Arrangement-Agreement-Outside-Date

 

The parties extended the Outside Date following receipt of a notice from the Minister of Innovation, Science and Economic Development indicating that the federal Cabinet has, under section 25.3 of the Investment Canada Act, ordered a continuation of the national security review of the proposed acquisition of Aecon by CCCI.

 

Stock collapsed the past few days. Aecon traded around $14 - $16 before a strategic review was announced and around $16 / $17 after that but before the CCCI proposal. Assuming the stock will drop to a price in that region the market is now pricing in a ~30% chance of deal failure (very basic math, ignoring time value etc.). Seems quite high, especially given that they seem to have all other regulatory ok's required. Just my 5 minute assessment though.

 

Stock might be a decent gamble at current prices but still, hard to handicap.

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  • 3 months later...

Yea you and I called this one writser. There was no way the government would approve this one. National security is usually a BS groud thrown in there to cover anything. But if ever there was an acquisition to be truly denied on national security grounds this was it.

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