Merger Arb Basket

[ACooke]

Has anyone considered throwing together a basket of merger-arbs?

 

To be forth-coming, I don't bring much to the table in regards to the likelihood of certain deals closing or breaking which is why I'm intrigued by taking a basket approach.

 

There seems to be a stack of pretty juicy spreads around; presumably many of these will close at close to current terms, and some will break.

Assuming the above is correct and with regards to some of the current spreads - it seems at first pass that a basket of these could net some reasonably low risk, decent, and market-neutral returns.

 

Would be interested if anyone is playing around with this approach.

Again, I haven't much to add outside of a set of keen eyes.

[scorpioncapital]

You have added alot just by suggesting a basket approach. This is key if you want to do it safely since there is an expected positive payoff. I am not sure if you can have a case of this time is different where the traditional majority of deals closing suddenly break not according to statistical history. I believe even the pandemic did not lead to such a result. Another way to think about it is to position size quite small if your goal is simply to say preserve your cash. At the current time this would require around a 5-10% annual return from this operation. So you can work backwards from that goal to find out what position sizes and spreads you'd need to top up your cash. I am not sure if this entire operation is better or worse than holding a TIP etf however.

Edited July 16, 2022 by scorpioncapital

[KPO]

4 hours ago, ACooke said:

Has anyone considered throwing together a basket of merger-arbs?

 

To be forth-coming, I don't bring much to the table in regards to the likelihood of certain deals closing or breaking which is why I'm intrigued by taking a basket approach.

 

There seems to be a stack of pretty juicy spreads around; presumably many of these will close at close to current terms, and some will break.

Assuming the above is correct and with regards to some of the current spreads - it seems at first pass that a basket of these could net some reasonably low risk, decent, and market-neutral returns.

 

Would be interested if anyone is playing around with this approach.

Again, I haven't much to add outside of a set of keen eyes.

Great topic. I’ve been doing this off and on for years with 5-10% of my portfolio. I always target cash deals and I hold the positions in my Roth or traditional IRA to avoid creating a tax event. On balance I’ve actually been surprised how well it’s worked out, but I don’t feel like I’ve developed a good repeatable process for sourcing ideas. It’s just sort of been randomly stumbling upon ideas from various sources. I’m actually in a spot where I need some new ideas as CNR, TEN & VG have mostly run their course.  I’ve got a bit of ATVI, but if others have ideas I’d be interested. 

[boilermaker75]

This is a site I look at to find risk arbitrage plays.

 

http://intrinsicedge.blogspot.com

 

It has probably been several months since I last checked. I usually do well with these plays so you would think I would be checking this site all the time.

[Gregmal]

RFP is interesting 

[StubbleJumper]

29 minutes ago, Gregmal said:

RFP is interesting 

 

Agreed.  The chances of this deal blowing up seem to be pretty low.  At various points over the past week, it's been possible to buy the shares for less than US$20, which basically provides an adequate return for the cash portion of the deal alone, assuming that the deal closes as expected during April.  Then the contingent value rights are where a guy might end up making a decent return.  My guess is that we will get a chance to buy RFP shares around $20 in September or October, which would make for a shorter hold...and if we get really lucky, maybe the market will get stupid and we can buy shares at $19 or something between now and Christmas.

 

SJ

[KPO]

2 hours ago, boilermaker75 said:

This is a site I look at to find risk arbitrage plays.

 

http://intrinsicedge.blogspot.com

 

It has probably been several months since I last checked. I usually do well with these plays so you would think I would be checking this site all the time.

Thanks! I’ll check this out. Sounds like you’re in the same boat as me in not spending much time on these, but still enjoying the outcome. 

[boilermaker75]

42 minutes ago, StubbleJumper said:

 

Agreed.  The chances of this deal blowing up seem to be pretty low.  At various points over the past week, it's been possible to buy the shares for less than US$20, which basically provides an adequate return for the cash portion of the deal alone, assuming that the deal closes as expected during April.  Then the contingent value rights are where a guy might end up making a decent return.  My guess is that we will get a chance to buy RFP shares around $20 in September or October, which would make for a shorter hold...and if we get really lucky, maybe the market will get stupid and we can buy shares at $19 or something between now and Christmas.

 

SJ

 

Or you could write Aug 19 expiration, 20-strike puts. They last traded on Friday at $0.29 per share. That would be a five week return of about 1.5%.

[KPO]

1 hour ago, Gregmal said:

RFP is interesting 

Yeah, this one is kind of interesting as there’s probably little risk that it doesn’t close, but it’s not clear to me what I’d end up with on the CVR after taxes (despite being in tax advantaged accounts). 

[StubbleJumper]

28 minutes ago, KPO said:

Yeah, this one is kind of interesting as there’s probably little risk that it doesn’t close, but it’s not clear to me what I’d end up with on the CVR after taxes (despite being in tax advantaged accounts). 

 

If you are able to buy the shares under US$20, you end up making more than $0.50/sh on the cash portion which is pretty close to an adequate return for tying up your capital for 9 months.  And then you get a lottery ticket in the form of the CVR.  The CVR is basically the potential of eventually getting up to US$500m/77m shares, or about US$6, pre-tax.  If you end up only getting half of that (ie, US$3/sh), it's still pretty decent, and if you get nothing at all from the CVR, it's still not a terrible outcome making 50+ cents per share on the cash portion of the buy-out.

 

My issue with the opportunity is that it will likely require a 9 month hold before getting the cash portion.  So, the current cash spread has been offering like 2.5-3.0 percent for a 9-month hold, which doesn't quite do it for me.  If I can still get that cash spread in October, I'd probably take the 2.5 or 3.0 percent return for what would be a 6-month hold, and then be delighted to get the "free" CVR lottery ticket that is potentially quite valuable.  Or, if the shares drop to like $19.25 next week, it would also be very attractive.

 

It's not quite a no-brainer at the moment, but if the market goes even a bit wacky on some day over the next couple of months it could quickly become a no-brainer.

 

 

SJ

Edited July 16, 2022 by StubbleJumper

[Gregmal]

9 minutes ago, StubbleJumper said:

 

If you are able to buy the shares under US$20, you end up making more than $0.50/sh on the cash portion which is pretty close to an adequate return for tying up your capital for 9 months.  And then you get a lottery ticket in the form of the CVR.  The CVR is basically the potential of eventually getting up to US$500m/77m shares, or about US$6, pre-tax.  If you end up only getting half of that (ie, US$3/sh), it's still pretty decent, and if you get nothing at all from the CVR, it's still not a terrible outcome making 50+ cents per share on the cash portion of the buy-out.

 

My issue with the opportunity is that it will likely require a 9 month hold before getting the cash portion.  So, the current cash spread has been offering like 2.5-3.0 percent for a 9-month hold, which doesn't quite do it for me.  If I can still get that cash spread in October, I'd probably take the 2.5 or 3.0 percent return for what would be a 6-month hold, and then be delighted to get the "free" CVR lottery ticket that is potentially quite valuable.  Or, if the shares drop to like $19.25 next week, it would also be very attractive.

 

It's not quite a no-brainer at the moment, but if the market goes even a bit wacky on some day over the next couple of months it could quickly become a no-brainer.

 

 

SJ

Sums up exactly what I’m looking for. 

[ACooke]

9 hours ago, KPO said:

Great topic. I’ve been doing this off and on for years with 5-10% of my portfolio. I always target cash deals and I hold the positions in my Roth or traditional IRA to avoid creating a tax event. On balance I’ve actually been surprised how well it’s worked out, but I don’t feel like I’ve developed a good repeatable process for sourcing ideas. It’s just sort of been randomly stumbling upon ideas from various sources

 

Sourcing/time drag is probably my largest concern here too, was hoping I'd grab an idea or two from this thread which has been fantastic so far - great hearing everyone's input. There's been a fair bit of commentary re. risk arb/special situations on some podcasts and blogs lately which is probably the main reason I'm considering throwing a basket together - plenty of stuff floating around and some decent looking spreads.

 

Do you just equal weight for the most part? I think equal weighting say a 10% chunk or whatever of you're portfolio makes sense if:

1. You're not bringing much to the table in regards to likelihood of closure.
2. You're not wanting to spend a hefty sum of time on each situation.

[LC]

I have a portion of my portfolio for special situations. Merger arb and the like. I generally weight positions equally but underweight some positions which have more of what I call the bullshit factor.
 

Think spirit airlines with 2 parties fighting over it and spirit obviously preferring the frontier bid (probably someone is getting paid??) despite jetblu giving a better bid. So I underweight something like that because who the heck knows what will happen there. 
 

i think they get popular when the market goes sideways and people are looking for uncorrelated returns. Everyone wants correlated returns in 2020. Nobody wants correlated returns in 2022.

[KPO]

16 hours ago, ACooke said:

 

Sourcing/time drag is probably my largest concern here too, was hoping I'd grab an idea or two from this thread which has been fantastic so far - great hearing everyone's input. There's been a fair bit of commentary re. risk arb/special situations on some podcasts and blogs lately which is probably the main reason I'm considering throwing a basket together - plenty of stuff floating around and some decent looking spreads.

 

Do you just equal weight for the most part? I think equal weighting say a 10% chunk or whatever of you're portfolio makes sense if:

1. You're not bringing much to the table in regards to likelihood of closure.
2. You're not wanting to spend a hefty sum of time on each situation.

I’m not all that precise on the position sizing, but they’ve been roughly equal to date.

[KPO]

Anyone looking at IRBT? 27% upside if it closes at the $61 announced cash price. Breakup fee is around $3.40/ share. I don’t see a valid case for this being blocked by regulators since Amazon isn’t a direct competitor currently, however if it doesn’t go through for whatever reason I could see a steep decline based on the terrible results they reported last quarter.  This is kind of the opposite of ATVI, which should hold up reasonably well if the deal is blocked by the FTC, but AMZN probably has a better path to closing it than MSFT.  Thoughts?

[LC]

My own thoughts are: 

1- whether amazon actually wants to close: they are slashing budget, and I don't have insight whether robotic automation is part of those budget cuts or not....will they find some way out of the deal? 

2- as you say the downside if it doesn't close is probably pretty heavy

[KPO]

13 hours ago, LC said:

My own thoughts are: 

1- whether amazon actually wants to close: they are slashing budget, and I don't have insight whether robotic automation is part of those budget cuts or not....will they find some way out of the deal? 

2- as you say the downside if it doesn't close is probably pretty heavy

Thanks LC. I’m most concerned with #1 for the exact reasons you outlined. No position yet for this reason. ATVI I’m fine to hold if the transaction with MSFT falls apart…..IRBT not so much.
 

Any other good candidates? With CNR & TEN closing I’d like to refill my merger arb bucket.

[KPO]

Bumping this topic given the ATVI success.  I like the fact the business performed well post announcement to the point it wasn’t an unreasonable value in its own right in the mid $70’s, which is what you’d ideally like to see in these situations.  With that said, what are folks looking at now?

[ValueArb]

How about Sigilon Therapeutics for the gamblers? Trading at $22 now, being acquired for $14.92 in cash and a CVR.

 

The CVR pays up to $111 per share if the SIG-002 drug is approved for sale. The first milestone payment of $4.06 is due on a human trial that is a pretty good chance of happening in 2024-2025. The remaining milestones are far more iffy and farther out.

[Paarslaars]

SIMO/MXL anyone? Well explained in the thread:

 

 

Seems like a win-win unless a sudden drop in earnings is expected.

 

[whatstheofficerproblem]

On 7/15/2023 at 10:37 PM, ValueArb said:

How about Sigilon Therapeutics for the gamblers? Trading at $22 now, being acquired for $14.92 in cash and a CVR.

 

The CVR pays up to $111 per share if the SIG-002 drug is approved for sale. The first milestone payment of $4.06 is due on a human trial that is a pretty good chance of happening in 2024-2025. The remaining milestones are far more iffy and farther out.

 

I think the first milestone is being priced in already, but from what I have been reading on these guys and the SIG-002, the drug is actually being supervised by LLY themselves. LLY is responsible for further testing and commercialization of the product, the underlying science behind SIG-002 doesn't seem all that complicated either, they explain it well in their filings. Given LLY's own history with diabetes medication, and the fact that the drug has already reached human trial stage, I think it very likely that this thing will get approved for sale. But the timeline I think will take at least 1-2 years from here. The risk/reward seems highly skewed, if a small position is taken, this is a 'heads I win, tails I don't lose much' kind of scenario.

[lnofeisone]

On 7/15/2023 at 10:37 PM, ValueArb said:

How about Sigilon Therapeutics for the gamblers? Trading at $22 now, being acquired for $14.92 in cash and a CVR.

 

The CVR pays up to $111 per share if the SIG-002 drug is approved for sale. The first milestone payment of $4.06 is due on a human trial that is a pretty good chance of happening in 2024-2025. The remaining milestones are far more iffy and farther out.

Thanks for the idea. I did a bit of digging over the weekend and agree with @whatstheofficerproblem it's a heads I win and tails I don't lose much. I put a bid in and see if I get a fill for something small. 

[Paarslaars]

How do you mean? Stock was trading at <5$ before the deal, how are you not losing much if you lose?

Or is the deal guaranteed and only the price still open dependent on results?

[whatstheofficerproblem]

The $14.92/sh is the price LLY is buying it for, the first CVR is $4.06 so the stock trading above that means that the market is pricing in the first payment i.e. the possibility if the human trial being a success. So yes, the deal is guaranteed and the price is dependent on results. Worst case, if the human trial fails you lose 30%. If the human trail passes, on paper you should gain nothing but news probably moves the stock up. If the second trail is a success, you get +26.39/sh in value so that is a ~122.7% upside from here. And if this gets approved for sale, that is another +81.89/sh and that is a ~500% upside from the current level.

 

The odds of losing 30% while the potential upside is 120% - 500% range sounds pretty sweet.

[lnofeisone]

15 hours ago, Paarslaars said:

How do you mean? Stock was trading at <5$ before the deal, how are you not losing much if you lose?

Or is the deal guaranteed and only the price still open dependent on results?

I would say the deal is near certain. This is not Amgen-Horizon with drugs on the line. This is a near-failing biotech and Eli Lilly. What you are really buying is a non-tradable CVR for $6 and possibility to pay out $111.