Merger Arbitrage In One Place (Part 2)

by: Special Situation Investor

Second batch of tracked merger arbitrage cases.

Spreads on large-caps driven mostly by antitrust concerns.

Two microcap M&A cases with shareholder votes in September.

This is the second part in new Special Situation series and below you will find additional merger arbitrage situations that I have on my radar. For further details on the series and first batch of M&A cases, please refer to this article.

Reliance Industries - RadiSys (RSYS) All Cash Acquisition

Spread: 9.5%. Expected closing: Q4 2018

RadiSys - US based microcap specializing in wireless technologies - to be acquired by Indian conglomerate Reliance Industries for $1.72/share. Deal already approved by RSYS shareholders and buyer's credibility is solid. The main concern is pending regulatory approvals, especially CFIUS, as mobile technologies might be considered strategic risk area. Positive mitigants in favor of CFIUS approval are small size of the transaction ($75M) and Indian rather than Chinese buyer.

T-Mobile US Inc. (TMUS) - Sprint (S) All Stock Merger

Spread: 11%. Expected closing: H1 2019

Merger between 3rd and 4th wireless providers in US that would supposedly create a stronger 3rd player in the market currently dominated by AT&T (T) and Verizon (VZ). Merger discussions surfaced as early as 2014 but were stopped due to antitrust concerns (Obama administration was strong proponent of market structure with 4 wireless carriers). Current merger agreement stipulating 0.10256 TMUS shares for each Sprint share was signed at the end of April. Antitrust concerns remain and regulatory review is in early stages. T-Mobile is reportedly running an active behind the scenes PR campaign to help tilt the scales in favor of the deal. Shareholder approval is given due to controlling stakes in both companies by Deutsche Telekom (OTCQX:DTEGF) and SoftBank (OTCPK:SFTBF), respectively.

Takeda Pharmaceutical (OTCPK:TKPYY) - Shire (SHPG) Cash+Stock Merger

Spread: 14%. Expected closing: H1 2019

Cross-border merger between two large-cap pharma companies (both in Top 20 globally on revenues). Antitrust clearance has been received from the US. Approvals from Europe, China and Japan are still pending. Aside from intense scrutiny expected from the European regulators, a big concern is approval by shareholders, especially on Takeda's side. A group of 'anti-Shire' shareholders (including founding Takeda family) have taken activist role and reportedly have gathered 25%-35% support. Admittedly, the group's attempt to block the deal earlier has failed. Due to large incremental debt load, transaction is seen as huge financial stretch for Takeda. Merger consideration: $30.33 cash + 1.678 Takeda ADSs.

Nanoxplore (OTC:NNXPF) - Sigma Industries (SSG.V) All Stock Merger

Spread: 10%. Expected closing: September 2018

Canadian microcap merger - graphene manufacture/supplier acquiring industrial equipment company. Transaction is subject to customary regulatory approvals (expected to be obtained around 20th September) and Sigma shareholder approval (meeting scheduled for 14th September). 30% of Sigma shareholders, mostly management and BoD, have entered into voting agreement. Limited Nanoxplore borrow availability is most likely the main reason for the spread to exist. Merger consideration: 0.39 shares of Nanoxplore.

Fidelity National Financial (FNF) - Stewart Information Services (STC) Cash+Stock Merger.

Spread: 12.5%. Expected closing: Q2 2019

Merger in title insurance industry - market leader FNF acquiring fourth largest player Stewart. The combined company would have unprecedented 44% market share. Deal has already been approved by Stewart shareholders; however, antitrust approval is obviously a big concern. Managements argue that the whole industry is already price regulated and therefore higher market share would not impact customers. FTC so far has requested additional info. Merger consideration: $25 in cash or 0.6425 in FNF stock. If regulatory approval will require divestment larger than $75M, then acquisition price will be adjusted downward on pro-rata basis from $50.2 to a minimum of $45.5 (at $225M divestments), affecting both cash and stock considerations. At the minimum offer price, the spread is almost eliminated.

Pareteum (TEUM) - Artilium (ARTA.L) Cash+Stock Merger

Spread: 12%. Expected closing: September 2018.

A friendly microcap cross-border merger within telecommunication software services industry. Companies have been cooperating since October 2017 and current merger is the result of the successful work together. Both companies have cross ownership in each other. 60% of Artilium shareholders signed voting agreement. No voting agreement on Pareteum's side and ownership is dispersed but no objections have been heard so far (meeting on the 13th of September). Merger consideration: 0.1016 Pareteum shares + 0.019 GBP per Artilium share. Pareteum borrow is expensive (45%). Large spread is likely the result of expensive borrow as well as this being microcap cross-border transaction.

Out of the deals listed above, I particularly like Pareteum/Artilium as well as Nanoxplore/Sigma transactions. The spreads on both are likely to narrow following shareholder votes in September and I would expect the votes to be positive in both cases. The main problem on these two is very low stock liquidity, thus accumulating material positions is problematic (especially with short time period remaining till vote).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.