Coronavirus sows doubt over corporate acquirers coming through
Mar 18, 2020
The coronavirus pandemic has virtually eliminated shaking hands. Its economic impact now has investors doubting whether many companies which shook on mergers and acquisitions will see them completed.
Traders and fund managers say the spread between agreed deal prices and subsequent trading in the stock of the acquisition targets is the widest they have ever come across.
"I have been doing this for 25 years, and I have never seen panic like this coming out of merger arbitrage spreads," said Roy Behren, managing member of Westchester Capital Management, which has $4.1 billion in assets under management, most of it invested in merger arbitrage.
Shares of acquisition targets typically trade at a small discount to the deal price in the period between the announcement of a transaction and its completion, pricing in risks such as the possibility that regulators will block it or that the financing for it will fall through.
However, deal price spreads widened dramatically this month, even though no deal has collapsed.
This is because investors fretted that the rout in the markets and the expected economic downturn will make it more likely that acquirers will try to walk away from deals, or that they will lose the financing to complete them.
Behren said the median annualised return in the deal price spreads he tracks has jumped from single percentage points to 25%.
Shares of U.S. jewellery chain Tiffany & Co ended trading on Tuesday at a 14% discount to the $135-per-share all-cash deal price at which it agreed to sell itself to France's LVMH in November. The stock was hovering at a 1% discount from the time of the deal announcement until earlier this month, offering one of the tighter spreads in merger arbitrage.
Behren said the blowout of the spread reflected investor fears that LVMH will get cold feet about the deal, as the pandemic weighs on consumer spending. Tiffany said on Tuesday it would temporarily close several stores, including its storied flagship store on New York's Fifth Avenue, in an effort to contain the spread of coronavirus.
Still, Behren said he believed the spread offered a buying opportunity because the chances of LVMH making a U-turn on the $16.2 billion deal remained low. LVMH and Tiffany did not immediately respond to requests for comment on the anxiety of some investors over their deal.
Other deals whose spreads soared this month include U.S. drugmaker AbbVie Inc's $63 billion acquisition of Botox maker Allergan Plc , private equity firm Apollo Global Management Inc's $6 billion leveraged buyout of U.S. information technology equipment Tech Data Corp , and buyout firm Blackstone Group Inc's $6.3 billion takeover of U.S. energy pipeline operator Tallgrass Energy LP .
Blackstone spokeswoman Paula Chirhart said the private equity firm was working with Tallgrass to prepare for a special meeting of Tallgrass shareholders on April 16 to vote on the deal, and that it would continue to comply with its obligations under the merger agreement.
AbbVie and Allergan said on Tuesday they reached an agreement with the U.S. Federal Trade Commission on regulatory issues that would allow their deal to close in May 2020.
The other companies and private equity firms either did not respond to requests for comments or declined to comment on the prospects of their deals.
"There are some interesting merger arbitrage opportunities where ... the stock price is dropping as if the deal is at risk, but the risk that the banks will pull out is lower than it was during the last financial crisis," said George Schultze, founder of investment firm Schultze Asset Management.
Investors argue that some of the deal price spreads are justified because the coronavirus outbreak is having an impact on the businesses of the acquisition targets and is making the pending deals too onerous for the buyers.
When U.S. casino operator Eldorado Resorts Inc agreed to buy rival Caesars Entertainment Corp for about $8.5 billion in cash and stock last June, Caesars shares traded at an 8% discount to the deal price on the day of the announcement.
The shares ended trading on Tuesday at a 45% discount to the deal price, as casinos across the United States are either forced or encouraged to shut down to contain the spread of the virus.
Eldorado and Caesars did not immediately respond to requests for comment.
In another example, Simon Property Group Inc , the biggest U.S. mall operator, agreed in February to buy rival Taubman Centers Inc in a deal valued at $3.6 billion. Taubman shares traded at a 1% premium to the deal price on the day of the announcement, on hopes of a better deal, but ended trading on Tuesday at a 15% discount, as investors worried that shoppers staying home would give Simon second thoughts about the acquisition.
Simon and Taubman did not immediately respond to requests for comment.
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