Risk Arbitrage Opportunities in Global Copper and CHC Helicopter

Canadian M&A activity has picked up with eight new deals announced since March. However, accessing debt continues to remain a challenge and Industry’s Canada recent rejection of Macdonald Dettwiler & Associates Ltd.’s (MDDWF.PK) C$1.33-billion satellite division sale to Alliant Techsystems Inc. (ATK) signals the increasing role national security is playing in takeovers.

Wellington West analyst Shawn Chopra said this will ultimately lead to increased spreads in M&A transactions involving foreign companies. In a note he told clients:

We believe that leveraged buyouts will have wide spreads relative to the pre-credit crisis (pre- August 2007) because access to debt will be difficult.

On April 14, Teck Cominco Ltd. (TCK) announced that it agreed to by Global Copper Corp. (GOCPF.PK) in a deal that will give Global shareholders C$12.00, or 0.26667 of a Teck Class B share, plus one share of a new company called Lumina Copper Corp. At full pro-ration, this would be C$3 in cash and 0.2 of a Teck Class B per Global common share. If Teck shares are below C$45 at closing, Global shareholders will receive C$12. If they rise above C$55, they receive C$14.

But the opportunity lies in Lumina Copper, according to Wellington analyst Catherine Gignac. She estimates it its worth roughly C$2.39 per share, or C$78-million, with its properties in Argentina valued at C$62-million. So if Global shares fall below C$14, Wellington recommends that risk arbitrage investors buy the stock, since it is estimated to be worth from C$14 to C$16.

Another play the firm recommends involves CHC Helicopter Corp. (FLI), which is being taken out at C$32.68 per share in cash. While the deal is expected to close in June, several regulatory hurdles remain. The company’s subsidiaries also need to be reorganized such that each subsidiary is majority controlled by nationals and members of the European Union,” Mr. Chopra noted. So with the shareholder vote more than a week away, he recommends investors buy CHC shares.