Glazer Capital - Special Situation Fund Q3 Update

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Includes: VAL, WWAV
by: Safety In Value

Summary

New position in WhiteWave Foods merger - All-cash deal.

Significant increase to Valspar deal - Big spread and could close by Q1 2017.

Bought a new SPAC, and kept other SPAC holdings.

Glazer Capital is a New York-based hedge fund that focuses on merger arbitrage and special situations investing. This is the second article in an ongoing series reporting on its holdings, brought about by the filing of its third-quarter portfolio report with the SEC. In my previous article, I mentioned that the fund runs a highly diversified portfolio. Of course, merger arbitrage positions have the potential to go significantly awry, given that there are often large drops if a deal breaks.

Company Symbol Value ($000s) Number of Shares Status
VALSPAR CORP VAL 38,673 364,601 Trades
LINKEDIN CORP LNKD 36,294 189,900 Trades
CEPHEID CONVERTIBLE DEBENTURES 1.25% Bonds 33,277 32,132,000 Deal Closed, no longer public
PRESS GANEY HLDGS PGND 28,069 694,776 Deal closed, no longer public
RACKSPACE HOSTING RAX 26,799 845,660 Deal closed, no longer public
INCONTACT SAAS 24,470 1,750,384 Deal closed, no longer public
INFOBLOX BLOX 23,100 876,012 Deal closed, no longer public
CEPHEID CPHD 17,562 333,317 Deal closed, no longer public
FLEETMATICS GROUP FLTX 17,280 288,104 Deal closed, no longer public
M III ACQUISITION CORP MIII 16,403 1,673,800 Trades
WHITEWAVE FOODS CO WWAV 15,181 278,902 Trades
VITAE PHARMACEUTICALS VTAE 14,958 715,000 Deal closed, no longer public
BOULEVARD ACQUISITION BLVD 14,066 1,432,358 Trades
CYNAPSUS THERAPEUTICS CYNA 13,643 339,122 Deal closed, no longer public
VIRGIN AMER VA 12,991 242,781 Trades
QUINPARIO ACQUISITION CORP 2 QPAC 12,639 1,275,349 Trades
MONSTER WORLDWIDE MWW 12,551 12,575,000 Deal closed, no longer public
BLUE BIRD CORP BLBD 11,602 1,183,880 Trades
CF CORP CL A ADDED CFCO 11,546 1,179,356 Trades
CAPITOL ACQUISITION CORP III CLAC 10,677 1,089,500 Trades
Click to enlarge

I've included the fund's 20 largest positions in the table above. Interestingly, as a primarily merger arbitrage fund, half of the positions are new since my previous article on the fund last quarter. Of course, the downside of that focus is that some of the positions are no longer actionable as the deals in question have closed.

Of the 20 largest positions, two are both new and still trading: M III Acquisition Corp. and WhiteWave Foods.

MIII is a special purpose acquisition company run by M III Partners, a boutique private equity firm. The firm focuses on small businesses in North America, but its mandate is flexible, which provides a wider set of potential targets for the SPAC. M III Partners publicly discloses a set of acquisition parameters here, which is potentially useful for evaluating what its SPAC will do. The most recent trade of M III was $9.75, so below the $10 price holders can receive by voting against a deal and turning in their shares. Thus, as is typical with SPACs, a M III investment has a "heads I win, tails I don't lose" characteristic.

WhiteWave Foods is the other new position the fund still holds, and the natural-foods company is the subject of an announced takeover by Danone (OTCQX:DANOY). The French food concern will be acquiring all outstanding shares of WhiteWave for $56.25 in cash, an approximate 3% spread to its current value. This seems like a relatively uncomplicated merger arbitrage position to me. There is little overlap in their major product lines, which should make anti-trust concerns a non-issue, and Danone is more than 4X bigger than the target, which should mean it can pull this off. The all-cash nature of the deal also makes it simpler to trade, as it does not require hedging. Additionally, the premium to the unaffected close price was less than 20%, which reduces the potential downside in the unlikely event the deal breaks. Seeking Alpha author From Growth to Value has an analysis of the deal and price here.

Although not a new position, the fund has doubled its stake in Valspar during the quarter. The Valspar deal is decidedly more complicated, but with the added risk comes a higher potential reward. The deal is also all cash, but there is a relatively unusual stipulation. If divestment of more of businesses totaling more than $650 MM in revenue is required by anti-trust regulators, the deal price will adjust from $113 per share to $105 per share. However, given that Valspar's shares are currently trading at $101.32, there is a reasonable spread to the lower price and an excellent spread to the higher one. The IRR on this deal would be especially attractive if it closes by its Q1 2017 target. That being said, the parties received a second request for information on the merger in May, so there is definitely a chance of delay or significant divestitures being required by the anti-trust authorities. A full analysis of the deal can be found here.

One other note, not related to a current position, is that the fund is taking legal action in the Alere (NYSE:ALR)/Abbott (NYSE:ABT) merger. As with many merger arbitrage investors, it likely lost money on this deal. The suit alleges that Alere and its management made misrepresentations that affected the company's share price, and that it lost money as a result. It will be interesting to see if it can recover some of its losses through this litigation.

I strongly believe merger arbitrage like that practiced by Glazer Capital has significant potential to improve portfolio level returns, as event-driven situations are often less correlated to the broader market, and are sometimes overlooked by market participants. This is especially true of smaller mergers, where big funds can't go due to their need for size. For that reason, I provide a list of small and microcap merger arbitrage opportunities every month to subscribers of the Microcap Review.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VAL over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.