Merger Arbitrage Mondays - The Bidding War For R. R. Donnelley Continues

Summary

• R.R. Donnelley & Sons Company has been in the middle of a bidding war between Atlas Holdings and Chatham Asset Management.
• RRD terminated its agreement with Atlas Holdings on December 14, 2021, and agreed to be acquired by Chatham Asset Management for $10.85 per share in cash.
• Last week, RRD received an unsolicited non-bidding "Alternative Acquisition Proposal" from a strategic party to acquire RRD for $11.00 per share in cash.

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Merger activity was muted during the last week of the year 2021 with no new deals announced and two active deals consummated, one of which was completed just 39 days after the signing of the definitive merger agreement. This month we included a U.S. M&A special year-end report in our January 2022 Special Situations newsletter in addition to highlighting two merger arbitrage opportunities as our spotlight ideas for the month. A snapshot of the special report is given below.

2021 U.S. M&A Special Report (source: Inside Arbitrage database)

During 2021, we saw 16 deals terminated, which was marginally better than the 17 deals that were terminated in 2020 but the news was not all bad. Only 4 deals were terminated on account of regulatory issues. Seven deals were terminated because they received new offers and in many cases Christmas came early because the deals went through bidding wars that lasted multiple rounds. Before Coherent (COHR) terminated its merger agreement with Lumentum (LITE) and finally tied the knot with II-VI Incorporated (IIVI), the deal went through nine rounds of counter offers involving three different parties.

We are seeing something similar play out right now with the acquisition of R.R. Donnelley & Sons Company (NYSE:RRD). The company has been in the middle of a bidding war between Atlas Holdings and Chatham Asset Management. We had added RRD to our list of potential deals on October 12, 2021, when Chatham Asset Management, RRD’s largest bondholder offered to acquire the company for $7.50 per share in cash. RRD’s price after this announcement was $6.57. RRD, however entered into an agreement to be acquired by Atlas Holdings. We wrote the following in our Merger Arbitrage post titled: Merger Arbitrage Mondays – R. R. Donnelley To Be Acquired By Atlas Holdings

On November 3, 2021, R. R. Donnelley entered into a definitive merger agreement to be acquired by affiliates of Atlas Holdings for approximately $2.1 billion or $8.52 per share in cash. On the same day, Chatham enhanced its offer to acquire all the common stock of RRD not already owned by Chatham for a range of $9.00 to 9.50 per share in cash. RRD’s price went up to $9.11 after this offer was announced. Under the terms of the merger agreement, RRD may solicit additional acquisition proposals from third parties during a “go shop” period of 25 calendar days from the signing of the merger agreement. Given this bidding war, it is not surprising to see R. R. Donnelley trade at a negative spread of more than 7% to the $8.52 per share acquisition price.

For a company with $1.5 billion in net debt on the balance sheet and twelve continuous quarters of revenue decline before a 6.42% increase in revenue in Q3 2021, it is rather unusual that not just one suitor but two of them are competing to acquire R. R. Donnelley. The go shop period is very short and if the company’s management does not engage with Chatham, shareholders would end up with a sub-optimal outcome.

After multiple rounds of counter offers, RRD terminated its agreement with Atlas Holdings on December 14, 2021 and agreed to be acquired by Chatham Asset Management for $10.85 per share in cash. This increased bid was almost 45% higher than Chatham's original bid of $7.50 for RRD on October 12, 2021. Much to the delight of arbitrageurs, the bidding war has still not ended. On December 29, 2021, RRD received an unsolicited non-bidding "Alternative Acquisition Proposal" from a strategic party to acquire RRD for $11.00 per share in cash.

The following seven deals had a closing date of December 31, 2021, but since they have not yet been completed, we are extending the closing dates for these deals to the end of the first quarter of 2022.

1. The acquisition of Independence Holding Company (IHC) by Geneve Holdings
2. The acquisition of Dawson Geophysical Company (DWSN) by Wilks Brothers
3. The acquisition of Nuance Communications (NUAN) by Microsoft (MSFT)
4. The acquisition of People's United Financial (PBCT) by M&T Bank Corporation (MTB)
5. The acquisition of Flagstar Bancorp (FBC) by New York Community Bancorp (NYCB)
6. The acquisition of PNM Resources (PNM) by Avangrid (AGR)
7. The acquisition of 51job (JOBS) by Garnet Faith Limited

SPAC Arbitrage

SPAC activity was also low with only three new SPAC IPOs filed. There were no new SPAC combinations announced last week.. You can find the new SPAC IPO announcements in our SPACs tool here.

Weekly Spread Changes:

The table below shows weekly spread changes between December 24 and December 31, 2021.

Symbol	Quote	AcquiringCompany	AcquiringCompany Quote	CurrentSpread	Last WeekSpread	Spread ChangeWeekly	DealType
BRG	26.39	Blackstone Real Estate (N/A)		13.11%	0.00%	13.11%	Special Conditions
PVG	14.09	Newcrest Mining Limited (OTCPK:NCMGY)	17.81	2.18%	0.82%	1.36%	All Stock
MGP	40.85	VICI Properties Inc. (VICI)	30.11	0.69%	-0.59%	1.28%	All Stock
FVCB	19.81	Blue Ridge Bankshares, Inc. (BRBS)	17.9	3.84%	2.71%	1.13%	All Stock
NFH	11.46	Unicorn II Holdings Limited (N/A)		4.71%	3.63%	1.08%	All Cash
TMX	45.23	Rentokil Initial plc (RTOKY)	40.13	21.60%	24.01%	-2.41%	Special Conditions
GSS	3.83	Chifeng Jilong Gold Mining Co., Ltd. (N/A)		2.09%	5.11%	-3.02%	All Cash
JOBS	48.93	Garnet Faith Limited (N/A)		61.56%	66.07%	-4.51%	All Cash
RRD	11.26	Chatham Asset Management, LLC (N/A)		-3.64%	1.12%	-4.76%	All Cash
NES	3.04	Select Energy Services, Inc. (WTTR)	6.23	-47.72%	-20.93%	-26.79%	All Stock

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Deal Statistics:

Total Number of Pending Deals
Cash Deals	43
Stock Deals	29
Stock & Cash Deals	7
Special Conditions	6
Total Number of Pending Deals	85
Total Deal Size	$457.51 billion

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Deal Updates:

1. On December 29, 2021, R.R. Donnelley & Sons Company announced the receipt of an unsolicited non-binding "Alternative Acquisition Proposal" from a strategic party to acquire all of the outstanding shares of RRD’s common stock for $11.00 per share in cash.
2. On December 30, 2021, Centene Corporation (CNC) and Magellan Health (MGLN) announced that they have obtained all required regulatory approvals necessary to close Centene’s pending acquisition of Magellan Health. Subject to the satisfaction of customary closing deliveries, the parties anticipate closing the acquisition on or about January 4, 2022.
3. On December 30, 2021, Advanced Micro Devices (AMD) and Xilinx (XLNX) released a statement, stating that they now expect the transaction to close in the first quarter of 2022.
4. On December 30, 2021, Golden Star Resources (GSS) announced that its shareholders approved a special resolution (the "Arrangement Resolution") in respect of a statutory plan of arrangement under Section 192 of the Canada Business Corporations Act, involving the company and Chifeng Jilong Gold Mining.
5. On December 30, 2021, Santander Holdings USA announced that it has extended the expiration date of its previously announced tender offer to acquire all outstanding shares of common stock of Santander Consumer USA Holdings (SC). The Transaction is not subject to shareholder approval and is currently expected to close in the first quarter of 2022 upon receipt of regulatory approval.

Closed Deals:

1. The acquisition of Dicerna Pharmaceuticals (DRNA) by Novo Nordisk (NVO) on December 27, 2021. It took 39 days for this deal to be completed.
2. The acquisition of CoreSite Realty Corporation (COR) by American Tower Corporation (AMT) on December 28, 2021. It took 43 days for this deal to be completed.

Top 10 deals with largest spreads:

Symbol	AnnouncedDate	AcquiringCompany	ClosingPrice	LastPrice	ClosingDate	Profit	AnnualizedProfit
JOBS	06/21/2021	Garnet Faith Limited (N/A)	$79.05	$48.93	12/31/2021	61.56%	-11234.21%
TMX	12/14/2021	Rentokil Initial plc (RTOKY)	$55.00	$45.23	12/31/2022	21.60%	21.72%
CHNG	01/06/2021	UnitedHealth Group Incorporated (UNH)	$25.75	$21.38	06/30/2022	20.44%	41.68%
XLNX	10/27/2020	Advanced Micro Devices, Inc. (AMD)	$248.00	$212.03	03/31/2022	16.96%	70.36%
MNTV	10/28/2021	Zendesk (ZEN)	$23.47	$20.74	06/30/2022	13.14%	26.79%
BRG	12/20/2021	Blackstone Real Estate (N/A)	$29.85	$26.39	06/30/2022	13.11%	26.73%
PNM	10/21/2020	Avangrid, Inc. (AGR)	$50.30	$45.61	12/31/2021	10.28%	-1876.62%
AJRD	12/20/2020	Lockheed Martin Corporation (LMT)	$51.00	$46.76	03/31/2022	9.07%	37.61%
ARNA	12/13/2021	Pfizer Inc. (PFE)	$100.00	$92.94	06/30/2022	7.60%	15.49%
SJR	03/15/2021	Rogers Communications Inc. (RCI)	$32.40	$30.34	06/30/2022	6.79%	13.84%

Click to enlarge

Conclusion:

M&A activity in 2021 rebounded sharply with 219 deals announced that were worth over $841 billion in comparison to $605 worth of deals announced in 2020. 194 active deals were successfully completed and 16 active deals were terminated. 111 potential deals in the works were announced in 2021 and 44 of these entered into definitive merger agreements. We expect this momentum to continue in the first part of 2022 before tapering in the second half of the year. Widening spreads on account of perceived regulatory issues and potential interest rate hikes, combined with bidding wars is going to make for fertile hunting grounds for arbitrageurs in 2022.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of NUAN, CHNG, PFE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: I have long positions in Nuance Communications (NUAN), Change Healthcare (CHNG), and Pfizer (PFE). I also have put options in Change Healthcare. Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.

Comments

[cjsmit77]

Cashed out of all RRD shares at 11.25 today, was hoping for as high as 12, but just not sure we're going to get there. Good luck to all still hanging in there.

[bagger10]

What happened to the column which specified "cash" or "cash+stock" or "stock"?

That question aside, always look forward to these M&A articles.

[Asif Suria]

@bagger10 It is still there but hidden from view. If you click on the table and scroll to the right you will see it. I can work with Seeking Alpha to see if there is a better way to represent these tables.

[bobblock]

Great article, Asif

[Asif Suria]

@bobblock Thank you for reading