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I wasn’t planning to write an update on the Puget Energy (PSD) arbitrage but a reader asked for my opinion on how I currently see the PSD merger so I’ll share it with everyone else and try to provide additional information.

Reminder Points

If the deal is approved, each share of PSD will be converted to $30 cash.

The deal is being financed by a “consortium of long-term infrastructure investors led by Macquarie Infrastructure Partners, the Canada Pension Plan Investment Board and British Columbia Investment Management Corporation and also includes Alberta Investment Management, Macquarie-FSS Infrastructure Trust and Macquarie Capital Group (collectively, the Consortium).”

All approvals have been received and the only process remaining is for reply briefs to be submitted by Oct 23 so that the UTC can review it and make a decision.

Price as of this writing is around $22.40 with a spread of just under 33% with about 1 week remaining which is an annualized profit of 1488%!

Along with every other company out there, Puget Energy was thrown out during the market meltdown.

Odds of the Merger

I’m going to do something very similary to what Sivaram from Can Turtles Fly has already done.

Upside Potential: 33%

Downside Potential: 10%

Probability of Success: 90%

Probability of Failure:10%

Time Frame: 1 week

From the odds that I’ve applied to the situation, this could be highly profitable.

Additional Details of the Merger

Back in July 23, PSD filed a multiparty stipulation involving Puget Holdings, Puget Sound Energy, Staff of the Washington Utilities and Transportation Commission, Industrial Customers of Northwest Utilities, Northwest Industrial Gas Users, The Energy Project, NW Energy Coalition, and The Kroger Company (NYSE:KR). A month later, on August 25, all but one of the issues have been agreed upon.

However, reading the appendix from the exhibits, it is clear to me that this one issue should not prevent or upset the merger. All parties, including the UTC staff, have basically given the OK for the merger to be approved. Even though PSD has a lot to agree upon in the stipulation, I don’t see anything outrageous.

On Oct 9, a filing made by PSD reveals that capital has been committed and ALL approvals have been obtained. All that remains is a review of the reply briefs if they are submitted by Oct 23. This leaves 1 week for an announcement by the UTC.

Insiders have also been vesting their options without any of them selling or exercising. It’s always important to see how insiders view the merger and interviews and actions of insiders confirm that the merger is a high priority in 2008 and they all want to see it go through.

Risks

At this point, I only see that truly unpredicatable occurrences, which the company has no control over, is the only thing that can upset the deal.

Completition Checklist

  1. Due diligence by both parties: Yes
  2. Financing and regulator approval:  Yes
  3. Get preliminary shareholder sentiment (or controlling shareholder approval):  Yes
  4. Obtain regulator (SEC, FCC, any and all) approval: Yes
  5. Get final shareholder approval at a meeting called for that purpose: Yes
  6. Insiders continually vesting or buying shares:  Yes

Conclusion

The market being what it is, irrationality has allowed the price to drop from the mid $27 to the mid $22 which is actually below pre-merger announcements. Even if by freak of nature the deal is canceled, the company offers a dividend yield of 4.5%. Not to mention that this is a reliable utility especially in times of a recession.

I don’t believe I’ve ever seen such an advantageous arbitrage opportunity as this one.

Disclosure: Entered into a 1/2 position at $22.50 and looking to add the remaining half between the range of $21.6 - $22.50.

Source: Puget Energy Update: Merger Is Currently On Track