Merger Arbitrage In One Place (Part 3)

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Includes: AET, AHL, APO, CVS, D, IDTI, KLAC, LNAGF, LNMIF, MRVL, ORBK, PX, RNECF, SBGL, SCG
by: Special Situation Investor
Summary

8% spread on Sibanye-Lonmin merger looks attractive.

Apollo-Aspen deal likely to close given Apollo experience in insurance industry.

Tight deadline for Linde-Praxair deal puts it on high risk.

This is the third part in the list of M&A deals that I am currently follow. See intro to the new Special Situation series here.

Out of the transaction listed below my favorite is Sibanye/Lonmin with both shareholders and regulatory approvals expected to pass easily. 30% of shareholders in each company already voiced support for the transaction. Also due to South African government ownership local regulatory approvals should not be an issue.

Similarly, I would expect Apollo-Aspen deal to close easily as the private equity company has already carried out a number of transactions in insurance industry space and seems have experience to get these closed.

Linde-Praxair, Dominion-SCANA and CVS Health-Aetna are all large cap transactions and the spreads are likely efficiently sized given the risks of each deal.

Sibanye Stillwater (SBGL) - Lonmin (OTC:LNMIF) All Stock Merger

Spread: 8%. Expected closing: Q4 2018.

An interesting deal between South African mining companies. By acquiring Lonmin for 0.967 Sibanye (1 ADR equals 4 shares) shares per each Lonmin share, Sibanye aims to become Nr. 2 platinum miner in the world. Despite the ambitions, both companies are currently facing many problems on their own. Lonmin has been having a huge cash burn - Net cash in Q3 2016 was $173m, Q4 2017 was $63m, and $17m in Q1 2018 and although it is not strictly a condition, Sibanye said numerous times that Lonmin must slow down its cash burn and stay cash positive in order for the deal to close. On the positive side, both companies’ largest shareholders, holding more than a third of the shares in each company said they will approve the deal, furthermore U.K. regulator has also approved the deal and South African regulators are going to decide in Q4. Government owns 29% in Lonmin and 11% in Sibanye so regulatory go-ahead is very likely.

Apollo Global Management (APO) - Aspen Insurance (AHL) All Cash Acquisition

Spread: 4.5%. Expected closing: H1 2019

Another acquisition of an insurance company by private equity firm Apollo. After 5 months of bidding process the price settled at $42.75 and a definitive agreement was signed on August 28th. This is still a fresh deal pending regulator and Aspen shareholder approvals. Insiders own only about 1.3% of stock so they do not have any big influence. Apollo already has plenty of experience in insurance company acquisitions, which increases the chances of successful closing for this one. Some of the current and past insurance-related investments by Apollo investment funds include Athene, Catalina, Brit, Athora, Tranquilidade and Amissima.

Dominion Energy Inc (D) - SCANA (SCG) All Stock Deal

Spread: 35%. Expected closing: before end 2018

The combination in energy and gas industry that aims to solidify Dominion Energy's position among the nation's largest and fastest-growing energy utility companies. So far the deal has received all key approvals required except public service commissions of South Carolina and North Carolina, which are expected to decide in December. States (and citizens) are mostly concerned about SCANA’s failed nuclear project V.C. Summers, for which utility customer have already paid $2bn or more than 1500$ for each household up to July 1st so far (further higher bill charges lined up for the next 60 years). This has been a heated political issue for already more than a year.

Dominion made an offer of $1000 refund and $10 bill cut for each SCANA customer after closing of the merger, but it was not enough for the lawmakers. In July States approved temporary 15% bill cut or about $22 for SCANA customers and are going to decide the permanent cut size in December. Dominion upped its offer to $1500 refund for each customer, but that was not enough. The deal hinges on whether the spread can be closed between what regulators see as fair bill reduction (likely $22-$27 per customer per month) and what Dominion is willing to accept (final offer $10 per customer per month). According to Dominion if the cut is going to be approved they will walk away, but this might be a bluff. Merger consideration: 0.6690 shares of Dominion Energy.

CVS Health (CVS) - Aetna (AET) Cash+Stock Acquisition

Spread: 3%. Expected closing: Q4 2018

Drugstore chain and pharmacy benefits manager CVS to acquire health insurer Aetna for $145 cash + 0.8378 CVS share. The deal already received approval from shareholders of both companies and is currently waiting for the green light from DOJ, which is expected to happen in the upcoming weeks. There are certain antitrust concerns and some divestments of Medicare drug business might be required. The potential buyer for this business is rumored to be found already (WellCare).

KLA-Tencor (KLAC) - Orbotech (ORBK) Cash+Stock Merger

Spread: 6.8%. Expected closing: Q4 2018

Large cap cross border merger in semiconductor technologies and solutions space. Despite getting an approval Orbotech shareholders and Japan regulators, the approvals from other regulators are still pending. The most important ones being DOJ and China, which has recently blocked Qualcomm/NXPI merger. This one might also get blocked purely due to political tensions between the countries. From the antitrust perspective, the combined market share in China of KLAC and ORBK is around 15%, whereas Qualcomm deal had more than 30% and, furthermore, a similar deal of Cavium and Marvell Technology Group (MRVL) received a green light recently. Merger consideration: $38.86 cash + 0.25 stock. A more detailed overview of the arbitrage opportunity can be found here.

Linde (OTCPK:LNAGF) - Praxair (PX) All Stock Merger

Spread: 9.5%. Expected closing: October 24, 2018.

Cross Atlantic merger between German and U.S. companies to create the largest industrial gas supplier. The deal already received approvals of both companies’ shareholders and several regulatory approvals. US antitrust approval is still pending and concern is that regulator will require larger divestments than the companies are willing to stomach. The divestment requirements revealed so far have already reach the limit stipulated in the merger agreement. Companies face a tight deadline (by German law) of 24th of October to close the transaction. Merger consideration: 1.54 Praxair shares.

Renesas (OTCPK:RNECF) - Integrated Device Technology (IDTI) All Cash Merger

Spread: 5.2%. Expected closing: Q1 2019

Fresh deal in the semiconductor industry between Japanese chip maker Renesas and U.S. based IDTI. The main motivation for Renesas is to make use of IDTI knowledge in wireless chips and data storage to boost its competitiveness in auto industry, particularly self-driving cars. Merger consideration of $49 per IDTI share, mostly financed by debt. Transaction is subject to IDT shareholders (99% institutional, no majors) and regulatory approvals, the main one being CFIUS. It is unlikely U.S. will block the deal as it is Japanese rather than Chinese company on the other side of the merger and IDTI has limited exposure to sensitive/strategic segments. More detailed overview of the deal is here.

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