Current Price – $11.16
Expected Buyout – $11.85
Upside – 7%
Expiration Date – 31st of March, 2017
This is a relatively straightforward situation and I will keep the write-up light as I am travelling today (happy to expand more in the comments section later).
Zweig Fund (ZF) and Virtus Total Return Fund (DCA) will be merged by the end of March. Both closed end funds are administered by the same asset manager and shareholders have already agreed to the merger.
The arbitrage situation arises from different discounts to NAV for each fund. DCA trades at 5.3% discount whereas ZF at 12.5% discount (see here for discounts). Merger will be carried out based on NAV. So the trade here is to buy ZF (which is cheaper relative to NAV) and then short equal amount of DCA (on dollar NAV basis). Both funds will also make distributions before the merger. The discount on the merged fund is likely to be somewhere in the middle, my guess is around 8%. An unhedged position of ZF is also a potential trade here, but then one is exposed to deviations in NAV and only to portion of the spread gap.
Bulldog was involved with DCA and forced a the fund to launch tender offer for 40% of the stock. Tender expired yesterday, so today is the first day when post-tender shares of DCA will be traded.