16 Of The Most Interesting Deals

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Includes: APC, CNC, CRARF, CTRL, CVX, EFII, ELAN, EXPE, FIS, HUM, IBM, LEXEA, LKSD, MLNX, NVDA, NXPI, ONCE, OXY, PETX, QCOM, QUAD, RDS.A, RDS.B, RHT, S, SFTBY, TMUS, UQM, WCG, WP, ZAYO
by: Bram de Haas
Summary

A quick review of the 16 most interesting M&A deals that are ongoing.

Included are several quite speculative situations as well as deals that are very unlikely to fail.

Most, but not all, are deals I'm currently invested in.

I've taken the M&A dashboard as a base to quickly review the most interesting M&A deals that are ongoing. I've highlighted the deals that I think are interesting and where I had/have/consider a position and briefly discuss them below. Here's are the first few rows of the dashboard with most importantly the expected annualized return on investment. This metric relies on several assumptions on closing date and odds of closing on which you may very well disagree and I'm refining all the time.

Acquirer's Ticker Target Ticker Raw Spread Expected Return on Investment Expected Annualized Return on Investment
JEC KEYW -0.09% -0.84% -4.95%
FCNCA ENFC 2.05% 1.55% 6.36%
ELAN PETX -0.47% -1.19% -13.42%
WM ADSW 3.11% 2.55% 4.46%
EFII 0.05% -1.14% -12.81%
EXPE LEXEA 0.71% 0.75% 9.34%
SFS -0.46% -0.99% -11.23%
QUAD LKSD 15.87% 8.08% 37.58%
BBX BXG 6.69% -2.65% -27.56%
OXY APC 3.05% 2.63% 11.04%
FIS WP 8.40% 7.82% 14.27%
NVDA MLNX 11.46% 10.81% 37.72%
CRARF AMS:KA 2.35% 1.92% 7.98%
BMY CELG 1.55% 1.08% 4.39%
TMUS S 11.53% -6.41% -32.36%
IBM RHT 2.31% 1.78% 7.34%
CNC WCG 10.91% 10.61% 10.25%
RHHBY ONCE 5.71% 3.59% 15.33%
Danfoss UQM 2.34% 1.76% 23.25%
ZAYO 6.54% 4.43% 7.87%
MPLX ANDX 0.12% 0.02% 0.13%
PK CHSP 3.57% 3.44% 10.81%
MRVL AQ 1.43% 0.62% 1.49%
MRK IMI 2.50% 2.35% 5.79%
EMCI 0.93% 0.83% 2.00%
CTRL 1.09% -0.62% -1.49%
BPL 6.35% 5.28% 17.05%
NETS 2.00% 2.04% 6.30%

Aratana Therapeutics

Elanco Animal Health Incorporated (ELAN) acquires Aratana Therapeutics, Inc. (PETX). I've got this deal at a negative expected annualized return on investment. However, I haven't included the value of a contingent value right or CVR worth up to $0.25. The deal is slightly profitable based on the raw spread, although you have to hedge out the equity component which will diminish returns somewhat. If you would put the CVR at a 100% payout ratio, which it certainly is not worth, I get to a 4.83% expected return. The CVR isn't settled on the closing date, but on the closing date, you do have your capital returned to you. For ease of analysis, let's consider the CVR settled at the closing date. The annualized expected return would exceed 76%.

Again, the CVR won't pay out anywhere near 100%, but the annualized return should be between 7% and 70%, and that's very attractive to me.

Electronics for Imaging, Inc

Electronics for Imaging (EFII) entered into a definitive agreement to be acquired by private equity firm Siris Capital Group, LLC in an all-cash transaction. Yes, this is another one I've got at a negative expected annualized return. However, the raw spread is still slightly positive at 0.03%, and there is a 45-day go-shop period where EFII can actively look for a better deal. it would have been nice if insider ownership were a little bit higher. I like these situations where I have a price "locked in", but there is potential for substantial upside within the next 45 days.

Liberty Expedia Holdings

Liberty Expedia Holdings (LEXEA) seems like a decent all-equity deal to invest some money. I even like the underlying company Expedia (EXPE), which has a great business model, is growing revenue at 10% per year, and EBITDA in excess of that, while it trades at a "normal" market PE of 16.8x. Given the small spread, I could see myself forego hedging out the EXPE side of the trade.

I estimate the probability of this deal closing to be extremely high because the company is essentially buying back its own shares. Both sides should benefit from this closing as planned.

LSC Communications

LSC Communications (LKSD) has an offer from Quad/Graphics, Inc. (QUAD) that yields an expected annualized return on investment in the 20s, which I find very attractive. Yet I've put the likelihood to close at 60%, and that may be too high. Perhaps, conservatively, I've put the closing date at 9/1/2019. There is a high likelihood this deal gets shut down because these two firms together dominate the U.S. printer market for books and magazines.

So far, I haven't dared to allocate money here because I suspect there is a decent chance I'm way off on my estimates of deal closing and closing date.

Both estimates influence the economics a lot. What intrigues me is that the share price of both firms has declined. Perhaps, there is something to say for an unhedged LSC Communications position except it has an enormous debt load. I would never go big on this one.

Anadarko

I've closed my Anadarko (APC) position even though the expected annualized return on investment is decent, given the Occidental (OXY) deal. I've got the likelihood of closing extremely high. There is also an argument to be made for a $60 break price because of the Chevron (CVX) bid. This is not a bad place to park some money. Spread could close sooner if there's an asset sale or something to Shell (RDS.A) (RDS.B).

Worldpay

Worldpay (WP) is being acquired by Fidelity National Information Services (FIS). I initially liked this deal but traded out when I thought the spread had closed (I may have been wrong at the time). Currently, it looks like one of the more attractive spreads again. It is in the financial industry, and I could be too optimistic about the time this will close, having put the date at 12/31/2019.

Mellanox

After the Nvidia (NVDA) offer, I initially liked Mellanox (MLNX)...

I've bought shares because 1) there appear to be many bidders. 2) The deal seems incredibly rushed. Perhaps Mellanox and Nvidia like each other best and want to get it done. This indicates there could be a good chance of another suitor coming over the top with a "hostile" bid Mellanox doesn't really want to take but its board will have to consider nonetheless. If that doesn't materialize the Nvidia offer covers us on the downside. The Nvidia offer doesn't look super secure right now but additional terms will be released and Nvidia can likely secure financing. But if there are no bids over the top in the next few weeks and Nvidia doesn't tie up financing, it may be best to scale down the investment.

...but traded out later as it became clear the bidding war had played out fully already.

The expected annualized return is great here because the market is pricing in a lot of China risk. As the U.S. China trade relations became more volatile, the spread widened. Either China purposely delaying this deal or blocking it could be very harmful. In that case, the downside is potentially huge because it is not a given, the other bidders could get it done if Nvidia can't. I don't expect China to interfere with this in the way it did with NXP (NXPI) and Qualcomm (QCOM).

However, if I'm wrong, the true expected return could turn from really good to awful. I haven't bought back in, and I am not entirely convinced I should even though my expected annualized return estimate is great.

KAS Bank

I bought too early into the KAS Bank acquisition by Caceis (OTCPK:CRARF), but it is still a decent deal to buy now. I've put the probability of a close at 99%, which is only below that of the Expedia deal, which is essentially buying its own shares.

Celgene

This is the largest arb position I've got on. I just recently upped my stake again after decreasing it about a month ago. The expected annualized return on investment is 4.39%, which is not terrible for a deal with a very high likelihood of completion. However, you also get a CVR, aka contingent value right, that pays out either $0 or $9 in the next few years. A $9 payout is a 10%+ return on a Celgene share and you get paid to acquire that option through the spread. I'm signing up for deals like that day and night.

Sprint

I got involved in the Sprint (S) and T-Mobile (TMUS) merger when it had been ongoing for a very long time. However, I always expected this to be an incredibly drawn-out affair with low odds of success. By April, I couldn't resist the high potential returns of this vexingly complex deal. I can't really get my head around where T-Mobile and Sprint will trade if it breaks. I've assumed a pessimistic break price for Sprint at $4. Two reasons I like this deal are that SoftBank (OTCPK:SFTBY) holds most of the Sprint equity. That makes this deal less interesting for big arb funds. It is also hard to hedge because T-Mobile could actually trade down in a deal-break as well.

Update: big news today with the FTC Chairman Ajit Pai recommending this deal. That's a lucky break, and I continue to view it as a speculative long although odds to close have obviously markedly improved today (I upped odds significantly in the M&A dashboard).

Red Hat

Red Hat (RHT) is being acquired by IBM (IBM). This is a very low-risk deal with a decent expected annualized return. I have a position but never got really excited about it since the deal was announced. I have it at a high probability to close and expect it to close by 9/1/2019. If you think it will close a lot faster, then this is a very good place to be.

WellCare

WellCare (WCG) is being acquired by Centene (CNC). I didn't love this deal from inception. I still don't because I don't think the expected annualized return spread accurately reflects the headaches I'm signing up for. That got all the more apparent with rumors about Humana (HUM) getting involved and shareholders revolting. Maybe I should spend more time on the Centene side of things. Perhaps, there is an opportunity there.

Spark Therapeutics

Spark Therapeutics (ONCE) is trading at a fairly attractive expected annualized return. The FTC is looking into this deal, but that doesn't mean they will shut it down. I've got it at a slightly below average close rate. I've also assigned it a generous break price because there were other bidders in this process. If the FTC blocks it, there may be a second chance opportunity here with a party that doesn't have as much riding on the Hemo A market.

UQM

UQM Technologies (UQM) is a $94 million market cap company being acquired in cash by a Danish behemoth of a company called Danfoss. The spread on this deal has widened slightly since my original article on this situation. Now implying a 23% annualized expected return. The only remaining hurdle is CFIUS aka the Committee For Foreign Investment and U.S. National Security.

Here's what the CEO said on the most recent earnings call:

Yes. Our expectation is yes they will allow it to happen. I mean when we had discussions with CFIUS in the past, obviously the big concern was Chinese companies buying up US based companies and the transfer of the intellectual property. And Danfoss being a global company with thousands of employees here in the United States and as with most companies have businesses all over the world and this type of merger and alliance was exactly what CFIUS was encouraging to look for when they blocked the previous deal. So it’s our expectation that this should go through without major issues. And we’re in regular discussion with CFIUS and answering follow on questions, so we expect this process to continue and be successful in the end.

Zayo

I've been wrong about Zayo (ZAYO) thinking it would never get a real bid. But it did, and it trades at a decent expected annualized return on investment. In my most recent article, I explained why I can't get around to this:

My main concern is that the company is so big compared to the acquiring funds. The faraway closing date is also a slight concern. Lots of things can go wrong in such a long time. I also don't understand why two buyout funds (experienced in transactions) would need such a long time to close. If I put the closing date in early March, the annualized return of ~7% doesn't get me excited on a risk adjusted basis. If I assume, what I would think is more realistic, is a closing date around New Years, and the annualized return goes up to 10%. However, we only get those returns if it closes. Selling Zayo has taken forever and many parties dropped out. Ultimately, I still can't get comfortable with this risk/reward but that may change as time passes and the spread stays wide enough.

Control4 Corporation

PE firm SnapAV will acquire Control4 (CTRL) in a cash bid for 23.91/share in cash. My initial assessment is that expected return is negative. However, the spread is slightly positive, and there is a 30-day go-shop period, this is a sector for hot money, and the buyer is a PE firm. I've bought a small position to camp out here for a few weeks.

Disclosure: I am/we are long CTRL, S, PETX, EFII, CELG, RHT, ONCE, UQM. 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.