It’s time to take our money and run!
You’ll recall, back on February 12, I shared my enthusiasm for an income-generating strategy known as merger arbitrage. It’s an alternative to gambling on the market’s next big takeover target, whereby we wait until after a deal is announced before investing. While the profit potential isn’t nearly as high, neither are the risks. And if you’re an income investor, that’s precisely the type of opportunity you should be hunting for – low risk and modest return.
Well, one of the merger arbitrage opportunities I told you to consider involved Outdoor Channel Holdings (OUTD). And if you ended up buying the stock, it’s time to cash out. Here’s why…
A Fat Yield Gets Even Fatter
Back on November 16, 2012, InterMedia offered to pay $8 per share for Outdoor. (When I first alerted you to the opportunity, Outdoor was trading at about a 5% discount to that price.)
In the wake of that merger agreement, a major shareholder, UTR LLC, fired off a “nastygram” to the board. It complained that Outdoor accepted “woefully inadequate deal terms” and, therefore, should make an effort to secure a better deal.
While management didn’t conduct a public bidding process, last week it did receive another unsolicited takeover offer. Kroenke Sports & Entertainment LLC, owner of the Denver Nuggets and Colorado Avalanche professional sports teams, offered to pay $8.75 per share.
The day the news hit, shares spiked 15% to close just shy of the new offer price at $8.65.
Since then, though, the stock has actually rallied above the new takeover price, which indicates that investors think a bidding war might erupt.
While that’s certainly a possibility, I don’t recommend you stick around to find out. Why? Because pigs get fat and hogs get slaughtered!
Originally, this was supposed to be an opportunity for us to earn a 5% spread. Yet it turned into a 15% windfall. Or, more simply, our income on this trade just tripled. You’re welcome.
Bottom line: We’d be hard-pressed to find another opportunity to earn a 15% yield in a month’s time. So instead of being greedy, take the money and run (and reinvest it).
You see, the income-generating power of merger arbitrage really kicks into high gear when you can invest your original capital in multiple deals over the course of a year.
And it’s not too late to invest in the other merger arbitrage opportunity I told you about last month – Zhongpin Inc. (HOGS). At current prices, it still sports a 5.2% spread.
If that doesn’t work for you, hang tight. I’m monitoring merger activity every day – both in the United States and Canada. And I promise to alert you to any other compelling merger arbitrage opportunities as they materialize.