Merger Arbitrage Analysis And Spread Performance - January 20, 2019

by: Malcolm Spink, CFA

Pacific Biosciences of California (PACB) rebounds following publication of further details surrounding the offer.

NxStage Medical (NXTM) declines amid continued volatility.

U.S. based merger arbitrage cash spreads continue to tighten.

This article explains the reasons behind the movement in a selection of the largest U.S.-based cash merger arbitrage spreads from the past week. We also analyze the attractiveness and profitability of each spread going forward and indicate the trading position or action we have taken (if any).

Deal Specifics

Pacific Biosciences of California (PACB) up 1.66%, rose following the announcement that they and acquirer Illumina had filed a DEFR14A - Revised definitive proxy soliciting materials filing detailing information to be used at a special stockholders meeting to be held on Thursday, January 24, 2019, at 8:00 a.m., Pacific Time. This follows on from a second request for information from the Federal Trade Commission during the previous week before last. With this new information in hand traders appear to have a renewed sense confidence in this deal being successful. The simple spread now stands at 8.99% with the stock still $0.66 away from the $8.00 offer price. We maintain our view that this could provide an opportunity for investment for a small position due to risks posed by the second request to deal extension. The merger is still expected to close in mid-2019 which provides an attractive annualized spread.

Luxoft Holding (LXFT) filed a copy of "NOTICE OF ACTION BY WRITTEN CONSENT AND DISSENTERS’ RIGHTS" on Wednesday where the directors of LXFT explain their reasons why the merger is "in the best interest of the Company and its shareholders". This helped the stock gain 0.72% and sees the spread close to 2.34%. This is $1.35 from the offer price of $57.00. Its deal to be acquired by DXC Technology Company was only announced on the 7th Jan and was not forecast to close until the middle of the year. We will maintain our long position for the time being but should the spread tighten further at such an early stage we will strongly consider taking some money of the table.

Dun & Bradstreet Corp (DNB) announced on the 17th January the company won approval from the FCA in the UK for its proposed takeover CC Capital, Cannae Holdings and Thomas H. Lee Partners. This helped push the stock higher by 0.63% to $144.46. Keeping with last weeks analysis we believe closure of this deal is imminent (the original forecasted closing date was at the end of the month) and will maintain our position despite the small profit potential.

Loxo Oncology (LOXO) filed a Schedule 13D highlighting a general statement of acquisition of beneficial ownership during the week. The tender offer is expected to expire on the 14th February. Only 50% plus one share is required for completion of the acquisition which commenced on the 17th January. The stock closed up 0.43% at $233.50 compared to a $235.00 offer price. This only leaves a 0.64% spread available but this deal may close in less than one month and is looking reasonably certain to do so. We do not currently have a position in this stock but may initiate one on any market weakness assuming the absence of any adverse specific deal announcements.

NxStage Medical (NXTM), one of last weeks strongest performers continued its volatile run. Again, despite there being no significant news or any filings made by the company the stock declined 1.38% or 40 cents to $28.50 compared to an offer price of $30.00. This gives a simple spread of 5.26%. This deal was originally expected to close at the end of last year and it appears Fresenius Medical Care AG & Co. is continuing to struggle to close the deal. A decline such as this during a rising market is a cautionary tale. We maintain a long position and actively trade around the position to try an exploit market volatility. Naturally this position requires constant and vigilant monitoring.

Integrated Device Technology Inc (IDTI) filed an 8-K on the 15th January listing the results of the recent shareholder vote. As expected, shareholders voted overwhelmingly in favour of the deal with Renesas Electronics Corporation. However, details were also given about the pending CFIUS review which is now on hold during the government shutdown and stated that it will "resume following the resumption of operations by the relevant U.S. government agencies". Antitrust approvals have already been received from a variety of global agencies in addition to the expiration of the HSR waiting period. But the CFUIS delay is sufficient to cause the spread to widen as forecasting a completion date becomes more treacherous. The stock lost 0.39% to finish at $48.24 against an offer price of $49.00. We maintain a small position in this stock under the assumption Government agencies will resume their responsibilities shortly.

The Broader Market

US based cash merger arbitrage positions saw more winners than losers this week for the fourth week running. This is consistent with a rising market. The performance for the top 20 largest spreads was positive 0.15%. This compares with the MNA ETF which returned a positive result for the fourth straight week running up 0.12%. The S&P 500 ETF, SPY produced a positive return to close up 2.89%. This partial recovery (so far) in the broader continues to have a positive effect on the spreads and remains the primary factor of spread movement. On the whole, cash spreads are tightening as the domestic market rises despite wider issues in the global economy. We suggest additional caution when entering spreads especially those seen as already having higher levels of risk.

Disclosure: I am/we are long NXTM, DNB, PACB, LXFT. 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.