Merger Arbs With Wide Spreads (Nov 2023)

This is a fresh review of the current merger arbitrage opportunities with wide spreads.

This post is an update on my previously published Merger Arbitrage overviewsin Jul’22, Sep’22, Jan’23, Apr’23 and Jul’23.

Below you will find a list of 15 deals with my quick takes on the situation and reasons for the spread.

The more attractive cases have already been posted as Portfolio Ideas, including MIXT (here) and YI (here). Others have been highlighted as Quick Pitches, including IDFB (here), AMTI (here), CNSL (here) and GTH (here).

A printable PDF as well as full descriptions below.

SSI Merger Arbitrage Review thumb

Spirit Airlines (SAVE)

  • Buyers: JetBlue Airways (JBLU)
  • Consideration: $30/share.
  • Spread: 168%
  • Exp. Closing: H1’24
  • Main risk: Buyer walking away, regulatory approvals, large downside.

Merger in the U.S. airline industry with a number of complications. Until recently, the main risk and reason for such a massive spread here were regulatory antitrust approvals with the soon-to-start trial with DOJ. Following SAVE’s very bad Q3 results, an even bigger risk now seems to be that JBLU could try to wiggle out of this merger, potentially by claiming a material adverse effect. SAVE’s financial performance has significantly deteriorated over the recent quarters, driven primarily by airplane engine issues. These issues will last throughout FY24 and JBLU could use this as an excuse to terminate the merger. However, JBLU’s chance of successfully claiming an MAE in court seems slim, given that the engine-related operational issues are temporary and have impacted the entire airline industry. The merger agreement specifically excludes “industry-wide” events from MAE conditions. On the antitrust side, DOJ’s arguments of reduced competition seems even weaker now that SAVE might face solvency issues as a standalone entity, due to continued significant cash burn and and upcoming large debt maturity in 2025. The judge expects an expedited trial, with a potential ruling by the end of the year. In the merger break scenario, downside would likely be significant.

Silicon Motion Technology (SIMO)

  • Buyer: MaxLinear (MXL)
  • Consideration: $93.54 + 0.388 MXL stock
  • Spread: 83%
  • Exp. Closing: TBD
  • Main Risk: Merger termination.

International merger in the semiconductor industry. This is one of the wildest merger arbitrage situations in the recent past. Silicon Motion Technology, a supplier of NAND flash controllers for SSDs, was getting acquired by its US peer MaxLinear. In July, after an unexpected approval from Chinese regulators, MXL abruptly terminated the merger, citing a “material adverse effect” due to the sharp semiconductor industry downturn since the merger was announced in 2022. SIMO disagrees with MAE and is litigating. The investment case now revolves around outcome of the arbitration which will take place in Singapore, with a resolution expected in 2025. Even if MXL is forced to buy SIMO, it might no longer have financing commitments needed to close the transaction. This suggest that SIMO is more likely to be awarded damages in excess of the terminatio fee rather than force the buyer to proceed with the merger.

111 (YI)

  • Buyer: Management
  • Consideration: $3.61/share
  • Spread: 70%
  • Exp. Closing: TBD
  • Main Risk: Non-binding offer.

US-listed Chinese company privatization by management. YI privatization saga is already ongoing for more than a year. Chinese pharmaceuticals distributor received non-binding offer from management (95% voting power, 67% economic interest) at $3.66/ADS. Special committee is still reviewing the offer, already for 14 months. Chinese non-binding privatization offers are inherently risky. However, reputable management as well as the financing for the buyout by a government-controlled entity give confidence that this setup has higher chances of working out. YI’s management seems incentivized to complete the privatization as YI is seeking to re-list on the domestic Shanghai STAR Market. YI would likely fetch a significantly higher valuation on the Shanghai market, as suggested by the trading price of its peer, YSB Inc, which was recently listed in Hong Kong. Since the initial proposal announcement, several more reputable parties have joined the buyer consortium with the latest additions in Jul’23. The market seems to have given up on this privatization, which might partially explain a very wide spread. Another reason for the market’s skepticism might be the ongoing significant healthcare industry reforms in China. The industry changes could have a material impact on YI’s businesses and in turn affect management’s willingness to proceed with the privatization. There is a risk that the offer price might be adjusted downwards.

YI was covered as a Portfolio Idea here.

iRobot Corporation (IRBT)

  • Buyer: (AMZN)
  • Consideration: $51.75/share
  • Spread: 61%
  • Exp. Closing: TBD
  • Main Risk: Regulatory approval.

Amazon’s acquisition of a robot vacuum cleaner maker. The merger spread has gradually widened from minimal levels to over 50% due to regulatory hurdles, deteriorating IRBT financial performance as well as potentially prolonged closing timeline. Several senators have been pushing the FTC to block the transaction. The second request from the FTC was received back in Sep’22 and the review is still ongoing. The deal has also raised antitrust concerns internationally – the European Commission has launched a detailed probe into the transaction, with the ruling expected by Feb’24. Regulator concerns revolve around privacy infringements and Amazon’s history of anti-competitive acquisitions. However UK’s CMA has cleared the transaction, arguing it will not lead to a substantial lessening in competition. IRBT’s performance has been deteriorating since the merger was announced, with operating losses and revenues falling substantially below previous FY22 guidance. In Jul’23, IRBT and AMZN agreed to revise the offer from $61/share to $51.75/share mostly to reflect new financing facility that IRBT had to enter to fund its on0going operations.

PEAK Bancorp (IDFB)

  • Buyer: BAWAG Group (BG:VI)
  • Consideration: $12.05/share.
  • Spread: 26%
  • Exp. Closing: TBD
  • Main risk: Regulatory approval.

Cross-border acquisition of a small US community bank. This is a merger arb setup with limited trading liquidity, making it actionable only for small PAs. IDFB, a nano-cap US community bank, is getting acquired by the holding company of one of Austria’s largest banks. The merger was announced in Feb’22. The only remaining hurdle for merger closing is approval from the Federal Reserve. Initially, any opposition from the regulator seemed unlikely given that IDFB is a very small community bank, while the buyer is a reputable bank supervised by the ECB. In 2022, the Federal Reserve Board had already approved BAWAG’s attempt to establish a representative office in the U.S. However, the merger has been dragging on for over 1.5 years, surpassing the initial closing deadline of Q1’23 with no updates from the regulators. Given the extended timeline, the lack of visibility into the regulatory approval process, and the broader turmoil in the U.S. regional banking sector, the spread has widened from the initial 10% to over 20% since early 2023. While the delay is alarming, it might be partially explained by an overburdened Federal Reserve staff, which has been tasked with addressing several recent bank failures. During the latest conference call in mid-October, BAWAG’s management hinted that the acquisition is ongoing and regulatory approval is still pending. The risk of the BAWAG walking away appears minimal as the acquisition would enable the buyer to obtain a local U.S. banking license, supporting its expansion efforts in the country.

IDFB was covered in Quick Pitches here.

Albertsons Companies (ACI)

  • Buyers: The Kroger Co. (KR)
  • Consideration: $27.25/share
  • Spread: 25%
  • Exp. Closing: Q1’24
  • Main risk: Regulatory approval.

Merger of two grocery store chains. The main risk is antitrust approvals as the merger would combine the two of the biggest supermarket companies in the country, particularly in the Northwest where ACI and KR together hold a commanding market share. Antitrust concerns have been raised by a number of parties, including US senators, several states and farmer/consumer/labor groups. Reportedly, FTC is expected to challenge the merger. However, ACI and KR are confident of circumventing the regulatory hurdles with the recently announced divestitures of a large number of stores in overlapping areas. While FTC has expressed concerns about these divestures, FTC’s concerns seem to revolve mostly around ACI’s previous divestitures related to another acquisition where the divested stores eventually went bankrupt. In the current case, the buyer of the to-be-divested stores is a Softbank-backed company with sufficient operating experience, scale and capital, suggesting that the story will not repeat and the divestitures might thus help ease antitrust concerns. The downside might be partially protected as ACI shares have drastically underperformed the market/peers since the merger announcement.

VMware (VMW)

  • Buyer: Broadcom (AVGO)
  • Consideration: $71.25 + 0.126 AVGO stock
  • Spread: 22%
  • Exp. Closing: Q4’23
  • Main Risk: Chinese regulatory approval.

Broadcom is continuing diversification into cloud computing with one of the largest tech mergers ever. This is a mammoth $61bn deal, giving chipmaker Broadcom a further push into the software industry. The transaction has already been approved by the European Commission and the UK’s CMA while the FTC has not challenged the merger. The last remaining regulatory hurdle and the biggest risk is approval from China’s SAMR. Over the last couple of months, SAMR has been rumored to approve the transaction shortly, with the proposed remedies reportedly accepted by the regulator. However, recent reports suggest that the Chinese regulator could delay merger approval amid US recent efforts to curb sales of chips for the Chinese market. Another large merger in the sector between Intel and Tower Semiconductor was recently called off after failing to secure approval from Chinese regulators. Nonetheless, AVGO and VMW have recently stated that they expect the transaction to close shortly. Merger outside date is set for November 26 after this date either party can walk away from the transaction without paying any penalties.

Applied Molecular Transport (AMTI)

  • Buyer: Cyclo Therapeutics (CYTH)
  • Consideration: 0.174 CYTH stock
  • Spread: 21% (17% after borrow fees)
  • Exp. Closing: Q4’23
  • Main risk: High borrow fees and uncertainty on the final exchange ratio.

Merger between two nano-cap biopharmas. Tiny failed biotech AMTI is getting acquired by its peer CYTH. The key factors contributing to the wide spread are the high cost of hedging (17% annually at present) and some uncertainty regarding the final exchange ratio. At current levels, borrow fees would cut the potential return from 21% to 17% assuming the transaction closes by the end of the year. The final exchange ratio will depend upon AMTI’s net cash at the time of closing. If AMTI’s closing net cash drops below $12.5m, the exchange ratio would fall below 0.174x. However, this seems unlikely as the target net cash level aligns with management’s latest cash runway guidance and already implies a likely excessive $5m/quarter cash burn rate for an empty cash shell. Approval from target’s shareholders is highly likely as management owns 22% and an additional 8% is held by a former director. Any opposition from minority stockholders would be surprising, considering that the offer represents a substantial premium above pre-announcement levels. The risk of the buyer walking away is minimal given that the transaction effectively serves as an equity raise in a challenging financing environment.

AMTI was covered in Quick Pitches here.

PNM Resources (PNM)

  • Buyer: Iberdrola (IBDRY)
  • Consideration: $50.30/share
  • Spread: 19%
  • Exp. Closing: Dec’23
  • Main Risk: Regulatory approval.

Large cross-border merger between two electric utilities. Spanish electric utility giant Iberdrola is acquiring New Mexico-focused electricity provider PNM Resources. The transaction has already received all the needed approvals other than the consent from New Mexico Public Regulation Commission’s (NMPRC). In Dec’21, NMPRC rejected the transaction due to Avangrid’s history of providing low-quality services in the US, legal investigation in Spain and the risk of increases in electricity prices. PNM/AGR have appealed the commission’s decision to the Supreme Court, claiming that the main sticking points, related to the legal investigation and alleged low-quality services provided by AGR in the US, have been either resolved or unsubstantiated. Interestingly, in early 2023 the entire NMPRC was replaced with new members appointed by the governor who has previously openly supported the transaction. The merger parties have since asked for transaction to be reconsidered by NMPRC instead of the Supreme Court, however, the Supreme Court has recently denied the request for remand. The court is expected to make a final decision on the case in the upcoming months. Merger outside date is set for Dec’23, with the option for a further 3-month extension.

Genetron Holdings (GTH)

  • Buyer: Management
  • Consideration: $4.03/share
  • Spread: 16%
  • Exp. Closing: Q1’24
  • Main Risk: Chinese transaction.

Definitive-stage privatization of a US-listed Chinese company by management. US-listed Chinese cancer screening firm is getting acquired by a buyer consortium led by company’s co-founder/chairman (combined 60% stake). Chinese management privatizations are generally risky, however, definitive agreement-stage transactions have historically been closing at a very high success rate. All closing conditions – approval from 2/3 of shareholders, not more than 15% of shareholders exercising their appraisal rights as well a a number of approvals from Chinese regulators – are likely to be satisfied. The privatization seems opportunistic as GTH’s operational performance was expected to rebound in 2023 after Covid pressures, however, the company has not yet released any results for FY23 and shares continue to hover near all-time lows.

GTH was covered in Quick Pitches here.

MiX Telematics (MIXT)

  • Buyer: PowerFleet (PWFL)
  • Consideration: 3.19056 PWFL stock
  • Spread: 16%
  • Exp. Closing: Q1’24
  • Main Risk: Target’s shareholder approval.

All-stock merger in the telematics industry. Automotive telematics company MIXT is getting acquired by its smaller peer PWFL. The transaction appears to have a strong strategic rationale as it will result in improved scale and enable the combined company to capture revenue synergies through the cross-selling of complementary products. The approval by buyer’s shareholder should not pose any challenges given that PWFL appears to be getting a good deal and will also eliminate the overhang of its convertible preferred stock. The primary reason for the spread seems to be some uncertainty surrounding MIXT’s shareholder approval – 75% in favor and not more than 3% exercising their appraisal rights. There is plenty of cheap borrow available for hedging purposes.

MIXT is covered as a Portfolio Idea here.

NeoGames (NGMS)

  • Buyer: Aristocrat Leisure (ARLUF)
  • Consideration: $29.50/share
  • Spread: 13%
  • Exp. Closing: May’24
  • Main Risk: Buyer walking away, prolonged timeline and regulatory approvals.

Cross-border merger in gaming industry. Australian gaming giant Aristocrat Leisure is acquiring NeoGames, an online lottery and gaming software provider. Shareholder approval appears almost guaranteed as 61% of NGMS equity holders are already in favor. The spread has widened from high single-digits levels to mid double-digits since early October. This might have been driven by the escalating Israel/Palestine conflict, as NGMS is registered in Israel. However, the merger terms specifically exclude war as a material adverse effect condition. NGMS primarily serves markets outside of Israel (86% of revenues are generated in the US and Europe), and the majority of the company’s employees are located in other countries. Moreover, the transaction would mark ALL’s entry into the still-nascent U.S. real-money gaming industry. The spread is also partially explained by the relatively long closing timeline and some uncertainty surrounding antitrust and foreign investment approvals. The online gaming and sports betting markets are tightly regulated in the U.S. and the EU, suggesting that the transaction might face additional scrutiny. NGMS holds a leading position in the online lottery space in the U.S. with approximately 67% market share.

Capri Holdings (CPRI)

  • Buyer: Tapestry (TPR)
  • Consideration: $57/share
  • Spread: 13%
  • Exp. Closing: 2024
  • Main Risk: Prolonged timeline and large downside.

Merger of equals in the luxury fashion industry. The transaction has already been approved by target’s shareholders. The spread seems to exist due to the long expected closing timeline (“calendar year 2024”) as the merger will require regulatory approvals in a number of geographies, including the US, EU and China. There is a substantial 30% downside to pre-announcement levels. Recent reports have suggested that one of CPRI’s European peers might make a competing acquisition offer.

Consolidated Communications (CNSL)

  • Buyer: Searchlight Capital Partners
  • Consideration: $4.70/share
  • Spread: 12%
  • Exp. Closing: Q1’25
  • Main Risk: Long timeline, regulatory/shareholder approvals.

Telco acquisition by its major shareholder. Wireline/fiber telecommunications provider CNSL is getting acquired by its major shareholder PE firm Searchlight Capital Partners (owns 34%). The main reason for the wide spread seems to be the prolonged closing timeline as the merger is expected to be finalized only by Q1’25. The extended timeline is understandable given requiremenet of approval from a number of regulatory bodies, including FCC, antitrust regulators, CFIUS and the California State Public Utility Commission. These regiulatory reviews are customary and are not expected to pose any significant risks. Approval from majority of minority shareholders seems likely to go through given the substantial premium offered, fair valuation compared to publicly-listed peers and other industry transactions, as well as CNSL’s potential difficulties in funding its ongoing fiber expansion as a standalone entity. There is a small risk of several activist investors opposing the transaction, however, the activists have been silent so far.

CNSL was covered in Quick Pitches here.

Amedisys (AMED)

  • Buyer: UnitedHealth Group (UNH)
  • Consideration: $101/share
  • Spread: 10%
  • Exp. Closing: 2024
  • Main Risk: Antitrust approval.

Bidding war in the US home healthcare industry. Home healthcare provider Amedisys has scrapped the all-stock merger with infusion services provider Option Care Health and has instead agreed to combine with healthcare insurance giant UnitedHealth. AMED shareholders are likely to support the deal as it values the target reasonably vs peers and its historical valuation range. The spread might be explained by regulatory risks as AMED is one of the largest home healthcare providers in the US while UNH has recently acquired another large industry player LHC Group. AMED and UNH have received requests for more information from the DOJ. Several senators, including Elizabeth Warren, have also urged the antitrust regulators to scrutinize the transaction. The merger comes amid DOJ’s recently launched broader antitrust probe into the managed-care industry where UNH has been among the most active acquirers. However, the home healthcare market is highly fragmented and even a combination of AMED and LHCG would still give UNH a less than 10% market share.


9 thoughts on “Merger Arbs With Wide Spreads (Nov 2023)”

  1. Does anyone have insights into the potential for a price cut or renegotiation in the Spirit/JetBlue merger?

    • Currently, I don’t believe there is any risk of MAE due to court testimony as engine failures and market state are not grounds for MAE. On the other hand, if Judge Young allows the merger conditional on significant additional divestures JetBlue and it significantly changes synergy with Spirit, they could try for MAE.

      In terms of price recut, it’s possible. However, after HA-ALK merger got announced, it seems more unlikely. Napkin math:
      $19,191,919 per plane
      Total planes: 198
      $31,147,540 per plane
      Total planes: 61

      Of course, this doesn’t represent other value adds for Jetblue such as gates but in my perspective Jetblue is getting a good deal as is.

    • One can always bully or bluff, but there is no rationale for one to be found within the 4 corners of the DMA.

  2. This AMTI-CYTH pair trade is a case study on how one can nail the final outcome and yet get obliterated on the short side.

    • Could you please elaborate a bit? It seems that the merger hasn’t yet closed, the spread stands at 13% and IB shows me that borrow rates have been pretty stable at sub-20 % since the beginning of October, shortly after the merger was announced. Or are you talking about the spread swings (ranging from roughly 10% to 55%) since the deal was announced?

  3. Yes. I am referring to the latter. The spread now is certainly closing. Not final yet though.

  4. Apart from the large downside on the Capri transaction, are there any regulatory concerns? I understand there were additional requests from FTC but can’t imagine this could be stalled due to regulatory issues. The rumour about the competing offer seems to have disappeared and the spread remains at 15% although likely it could take up to 9 months if not longer (not sure about the timeline)

    • It’s probably a combination of 3 things:
      1) Not fully clear when will the merger close – I believe the parties still say it’s sometime in 2024.
      2) Regulatory review. I’ve read that people don’t seem to think this should be a major risk. However, the spread increased after the FTC’s 2nd review last month, so the market sees this as a risk. Without specific arguments for or against regulatory review, I prefer to remain on the sidelines, especially given the substantial size of this nearly $10 billion merger.
      3) Large downside to pre-announcement prices of around 30%.


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