Merger Arbs With Wide Spreads (Aug 2024)

With another quarter in the books, I am refreshing SSI review of all merger arbs with wide spreads. This is a continuation of my previously published pieces in Jul’22, Sep’22, Jan’23, Apr’23, Jul’23, Nov’23, Jan’24 and Apr’24.

Since my last update, five merger arbitrage opportunities have played out – one of which closed successfully (OLK), and in four cases, the spreads have meaningfully tightened (CTLT, BEST, AMED, and CNSL).

In this post, you will find 23 merger arbs with my quick takes on all the cases and reasons for the spread. There are 12 new situations that haven’t been covered in the previous reports. The most attractive ones have already been covered on SSI, including BATL, BHIL, MTTR, GAN, and ASXC.

A printable PDF as well as full descriptions below.

 

Battalion Oil Corporation (BATL)

• Buyer: Fury Resources
• Consideration: $9.8
• Spread: 212%
• Exp. Closing: Q3’24
• Main Risk: Likely termination of the transaction.

A pure-play oil and gas exploration company is being acquired by a private peer, Ruckus. The wide spread is primarily due to concerns about the availability of financing. The funding aspect of the deal has been questionable, as evidenced by the constant changes in the deal structure during negotiations. The board, desperate to keep the merger on track, agreed to sign the agreement without finalized funding, only insisting that Ruckus guarantee at least a $20m termination fee by depositing it into an escrow account. This requirement was only partially met, with just the first $10m covered. Later on, the buyer shared evidence of $150m equity commitment (out of $200m required). However, a few weeks later, they missed the deadline again for providing the remaining $50m. This, along with the continued deterioration in operational performance, makes it hard to believe that this transaction will be completed on its current terms or at all. The latest deadline to provide the remaining financing has been shifted to September 12.

BATL is covered in more detail on SSI here.

Capri Holdings Limited (CPRI)

• Buyer: Tapestry (TPR)
• Consideration: $57/share
• Spread: 78%
• Exp. Closing: 2024
• Main Risk: Regulatory approvals.

This is a large all-cash merger in the fashion industry, combining luxury brands Versace, Jimmy Choo, and Michael Kors (owned by CPRI), with Coach, Kate Spade, and Stuart Weitzman (owned by TPR). The transaction has already been approved by the target’s shareholders. The key reason for the spread is the regulatory pressure in the US. The Chinese and EU regulatory approvals have been granted. In April, the FTC sued to block the deal, alleging that it would meaningfully decrease competition in the affordable handbag market. If the merger is approved, Tapestry/Capri would become the 4th largest luxury player globally. However, the market share of the combined company in “affordable luxury” is likely much higher, anywhere between 30-50% in the US. The court’s decision will largely depend on how the target market is defined. The trial date is set for September 9.

Hawaiian Holdings (HA)

• Buyer: Alaska Air Group (ALK)
• Consideration: $18/share
• Spread: 41%
• Exp. Closing: Q2’25
• Main Risk: Regulatory approval.

Hawaiian Airlines is getting acquired by Alaska Airlines in an all-cash transaction at $18/share. The key reason for the wide spread is the potential issues with antitrust approval, particularly in light of the blocked merger between SAVE and JBLU earlier this year. The deal was already hit with a second request review from the DOJ. The parties quickly complied with the request and agreed not to enter into the transaction for 90 days post-compliance. While the transaction would create the fifth-largest airline in the US, the combined company would only capture an estimated 6% of the market, which is significantly below the c. 80% market share held by the four largest players. Moreover, the two airlines only compete head-to-head on a small fraction of their combined routes (12 out of 433).

Volatus Aerospace Corp. (VOL.V)

• Buyers: Drone Delivery Canada Corp (FLT.V)
• Consideration: 1.785 FLT.V stock
• Spread: 40%
• Exp. Closing: 2024
• Main risk: No borrow + large downside.

Volatus Technologies (VOL.V), a drone technology reseller and service provider, is merging with Drone Delivery Canada (FLT.V), a drone developer and operations company. There is no FLT borrow available for a hedged arbitrage. Putting up an unhedged trade is simply too risky here, considering the limited liquidity on both sides and FLT’s massive cash burn. Moreover, the downside risk if the merger breaks could be significant, considering VOL’s leverage and limited cash flow generation.

Albertsons Companies (ACI)

• Buyers: The Kroger Co. (KR)
• Consideration: $27.25/share
• Spread: 39%
• Exp. Closing: Q1’25
• Main risk: Regulatory approval.

The main risk is antitrust approval, as the merger would combine two of the biggest supermarket companies in the country, particularly in the Northwest, where ACI and KR together hold a commanding market share. FTC has already filed a lawsuit to block the merger and will argue its case in Oregon federal court on August 26. Additionally, Washington and Colorado have filed separate lawsuits to block the deal. The trial with the Colorado State Attorney General, initially scheduled to start on August 12, has been moved to September 30. In the meantime, a judge in Colorado has temporarily blocked the merger. Albertsons plans to fight the regulators with an agreement to divest almost 600 stores to C&S Wholesale Grocers, that’s an addition of more than 150 stores compared to the initial plan. However, FTC along with the state AGs remain skeptical and argue that these divestitures could mirror the failed divestitures from the Albertsons/Safeway merger back in 2015, when buyer of those stores went bankrupt, leading to closures and reduced competition. Worth noting that many of the same stores Albertsons divested were later reacquired by the company during the previous buyer’s bankruptcy.

United States Steel Corporation (X)

• Buyer: Nippon Steel Corporation (5401:T)
• Consideration: $55/share
• Spread: 32%
• Exp. Closing: 2024
• Main Risk: Opposition from politicians and other stakeholders.

The bidding war for US Steel has culminated in a merger with Japan’s largest steelmaker, Nippon Steel, at $55/share. The spread exists due to risks surrounding regulatory approvals. At this point, the deal seems to be dead in the water given the sheer amount of political and regulatory pressure from both sides of the political aisle. DOJ has also just launched an in-depth investigation of the merger. At the end of July, the parties pulled their applications with CFIUS and are reportedly planning to align the refiling with the US presidential election. The parties have even hired former US Secretary of State Mike Pompeo to lobby for the deal with the potential second Trump administration. It’s worth noting that both Trump and Biden have previously stated that they would oppose the merger. Another key hurdle, likely to remain in place regardless of the next administration, is the unwavering opposition from the United Steelworkers (USW) union, whose approval is necessary for the deal to close. All attempts by Nippon Steel to reach a mutually beneficial agreement with USW have failed so far.

Matterport (MTTR)

• Buyer: CoStar Group (CSGP)
• Consideration: $2.75/share in cash + $2.75/share CSGP stock
• Spread: 31%
• Exp. Closing: 2024
• Main Risk: Antitrust

Matterport, a 3D visualization service provider for real estate listings, is getting acquired by Costar Group, a large real estate information and analytics provider that also operates several commercial and residential listing sites. The key reason behind the spread is uncertainty surrounding antitrust approvals. MTTR’s 3D tours is one of the key features in many real estate listing websites, including those owned by Costar and its competitors. Regulators might be concerned that Costar will use Matterport to foreclose on its competition. The FTC has already requested a second review of the transaction.

MTTR is covered in more detail on SSI here.

GAN Limited (GAN)

• Buyers: Sega Sammy (6460:T)
• Consideration: $1.97/share.
• Spread: 29%
• Exp. Closing: Q4’24
• Main risk: Termination of the deal if gaming licenses are not received.

B2B/B2C online casino software provider GAN is getting acquired by the Japanese conglomerate Sega Sammy at $1.97/share. The existing spread seems to be explained by uncertainty surrounding securing gaming licenses in a number of geographies, most notably Chile as well as the US. The Chilean Senate’s decision to approve the first draft of the online gambling law was expected in Q2 2024, which would allow gambling operators to begin the application process with the newly established gambling regulator. However, it appears that the Senate’s decision has been delayed, and the law continues to be under review. It is still unclear if GAN will be eligible to receive an operating license after a pending online gambling-related bill passes. Meanwhile, the merger agreement includes a provision allowing Sega Sammy to terminate the transaction if the Chilean government enacts any laws that make GAN’s operations in the country illegal. Potential downside in a deal-break scenario is likely to be substantial.

GAN is covered in more detail on SSI here.

Spar Group (SGRP)

• Buyer: Highwire Capital
• Consideration: $2.5/share
• Spread: 26%
• Exp. Closing: TBD
• Main Risk: Buyer’s credibility, limited valuation support + non-binding offer.

Merchandising and marketing outsourcing services firm Spar Group, which serves retailers and distributors, has been approached by the private equity firm Highwire Capital. The spread can be explained by several factors: the buyer’s lack of credibility, the transaction being in the early letter of intent (LOI) stage with DD ongoing, and limited valuation support. Highwire Capital was established earlier this year by founders with limited to no private equity experience. Additionally, there has been no news about the merger for almost two months since the announcement. This is further compounded by SGPR management’s statement that they engaged with 165 parties prior to the current LOI, with all previous offers being substantially lower than Highwire’s. Most importantly, throughout the year, SGPR founders sold their shares at a 30%+ discount to Highwire’s bid. The combination of these factors makes it difficult to believe that the deal will close anywhere near the current offer, if at all.

ANSYS (ANSS)

• Buyer: Synopsys (SNPS)
• Consideration: $197 + 0.3450 SNPS
• Spread: 21%
• Exp. Closing: H1’25
• Main Risk: Regulatory approval.

Chip design hardware and software maker Synopsys is acquiring the multi-purpose engineering design software company Ansys. The spread is mostly due to the requirement for a high number of regulatory approvals across several jurisdictions, particularly in China. China’s antitrust authority, SAMR, has been engaging with third parties about the extent of the horizontal overlap between the two companies. Reportedly, SAMR has received dozens of complaints regarding the merger during these discussions. Meanwhile, the parties have received a second request for review from the FTC. The businesses of the two companies do not overlap directly as SNPS manufactures tools for designing the chips themselves, while Ansys specializes in software for evaluating larger electronic systems where those chips are utilized. However, both companies hold strong positions in key industries, such as semiconductors and EVs, and this has subjected the merger to closer scrutiny. This is especially pertinent in light of the Biden Administration’s decision to put some of Ansys’s products on the export control list, in an effort to prevent the resale of US technology to the Chinese military. As a reminder, China has recently blocked the takeover of Tower Semiconductor by Intel, likely in retaliation for the high-tech export restrictions.

Benson Hill (BHIL)

• Buyer: Argonautic Ventures
• Consideration: $7.826/share
• Spread: 20%
• Exp. Closing: TBD
• Main Risk: Non-binding offer + terminal value risk

Benson Hill, a developer of new soybean varieties, received an offer from a consortium of shareholders, including the BHIL’s co-founder and former CEO. Several factors contribute to the current spread, including the non-binding nature of the offer, high cash burn, and the orphaned SPAC label. The stock is down 98% since going public, so investor skepticism is not surprising. However, the market seems to be underestimating the chances of the transaction closing. The consortium of investors, which owns 16% of the stock, has been involved with the company since its early venture days and should be well-acquainted with the business and the prospects of its technology/IP. It seems unlikely that the buyers will walk away.

BHIL is covered in more detail on SSI here.

Infinera Corporation (INFN)

• Buyer: Nokia (NOK)
• Consideration: $4.66 + 0.5355 NOK
• Spread: 18%
• Exp. Closing: H1’25
• Main Risk: Regulatory approvals

A global optical network solutions provider is merging with the telecom equipment giant Nokia. Part of the spread could be explained by some antitrust concerns as this transaction would create the third-largest global player in the optical network market with a combined 20% market share. However, the merged company would only catch up to Ciena, which also has about 20% market share globally, and would still be well behind Huawei with 31% market share. In the US the merged company would be well behind Ciena, which has 51% of the US market. Shareholder approval is unlikely to cause any issues here, considering that the largest active shareholder of INFN, Oaktree Optical, supports this transaction with its 11% stake.

Desktop Metal (DM)

• Buyer: Nano Dimension (NNDM)
• Consideration: $5.06/share
• Spread: 16%
• Exp. Closing: Q4’24-Q1’25
• Main Risk: Uncertain consideration

A struggling 3D printing company, Desktop Metal, is getting acquired by a larger, well-capitalized Israeli-based peer. The spread is mostly driven by the uncertainty in final consideration to be received in this meger. The consideration is subject to adjustments based on total transaction expenses and the amount potentially drawn from a loan facility if the merger extends into 2025. The headline figure of $5.50/share could move down to $4.07/share with a full hit of trasnaction expenses and loan drawdowns. Management currently estimates transaction expenses to be at $0.44/share (capped at $0.63/share). Any further reduction would come from the amount drawn on the loan facility. Considering the extent of leverage and the cash burn at DM, it would not be surprising if they were forced to use the facility and final consideration approached $4+/share.

Spirent Communications (SPT:L)

• Buyer: Keysight Technologies (KEY)
• Consideration: GBP 2.02/share
• Spread: 14%
• Exp. Closing: Q2’25
• Main Risk: Regulatory approval

Hardware and software testing company Spirent Communications is getting acquired by a much larger peer, Keysight Technologies. The spread is driven by the expected regulatory hurdles. The companies have to get antitrust approvals in multiple jurisdictions, including the US and the UK, along with foreign investment reviews in the UK, France, and Germany. The approval process won’t be easy considering that the combined company will hold an 80% market share in the high-speed ethernet (HSE) telecoms testing sector. The combination would essentially grant a near monopoly to Keysight in the US.

McGrath RentCorp (MGRC)

• Buyer: Willscot Holdings (WSC)
• Consideration: $123/share in cash (0.6x) + 2.8211 WSC (0.4x)
• Spread: 13%
• Exp. Closing: Q3’24
• Main Risk: Antitrust approval

McGrath RentCorp, a modular building rental company, is getting taken over by its larger peer, Willscot Holdings. The spread is largely explained by the regulatory scrutiny of the transaction. The merged company will hold by far the largest share in the portable building space in the US. The parties have already been hit with a second request review from the FTC and the regulator has asked for more time to review the transaction. The final decision has been postponed to September 2024 and will likely depend on how narrowly FTC defines the market. If it’s just the modular rental market, there is a high chance the merger will be blocked. However, as management noted, if we look at the market in the context of the broader commercial real estate space, the combined stake of these enterprises would just be a drop in the bucket.

HomeStreet, Inc. (HMST)

• Buyer: FirstSun Capital Bancorp (FSUN)
• Consideration: 0.3867 FSUN stock
• Spread: 12%
• Exp. Closing: 2024
• Main Risk: changing transaction terms

HomeStreet, a regional bank focused on multifamily lending, is getting acquired by a larger peer, FirstSun Capital Bancorp, in an all-stock transaction. The spread can be largely attributed to the risk of a potential reduction in the consideration, as well as the lack of available borrow on FSUN stock. Since the announcement of the merger, the consideration has already been reduced once from 0.4345 shares of FSUN to 0.3867 shares. Given the continued deterioration in HMST’s performance and improving results at FSUN, the risk of another cut looms over the deal.

First Financial Northwest (FFNW)

• Buyer: Global Federal Credit Union
• Consideration: $23.50/share
• Spread: 11%
• Exp. Closing: Q4’24
• Main Risk: Regulatory approval + long timeline.

First Financial Northwest, a community bank with operations in Washington, has agreed to combine with Global Federal Credit Union. The key reason for the spread seems to be pending approvals from a number of state and federal regulators. Even though historically most of similar bank acquisitions by credit unions have closed successfully. However, recently the HSBI acquisition by Vystar as well as Premier Bank acquisition by GreenState Union were blocked on regulatory grounds. The pending acquisition of FFNW would be the second-largest bank purchase by a credit union. There are also some concerns about regional overlap between the two entities. Global operates 27 branches in Washington, which will increase to 42 branches following the purchase of FFNW. The number of Global’s branches will be second only to the $29.1 billion BECU in Tukwila, Wash., which operates 63 locations. The expected closing timeline is c. 5 months, with up to an additional 5 months before receiving the distributions.

Hess Corp. (HES)

• Buyer: Chevron (CVX)
• Consideration: 1.025 CVX
• Spread: 11%
• Exp. Closing: TBD
• Main Risk: Arbitration with Exxon

Chevron is taking over Hess Corp, a major O&G company, in an all-stock transaction. The key impediment to the transaction is the start of the contract arbitration case between ExxonMobil and Hess over the right of first refusal (ROFR) on a 30% stake in Hess’s prized Guyana assets. ExxonMobil’s position is that the ROFR is triggered by a change of control of Guyana as a result of this merger and that Chevron structured the deal to bypass it. Given that the majority of Hess’s value lies in its Guyana assets, the arbitration court’s decision could make or break the deal. Regulatory approvals are unlikely to cause any issues despite continued pressure from the Senate and the start of the second request review from the FTC (the regulator has just delayed its decision on whether to block the merger until the arbitration case with ExxonMobil is settled). The regulators have just approved the acquisition of Pioneer Natural by ExxonMobil, a deal equivalent in size to Chevron’s bid for Hess. The case is expected to be resolved by May of next year.

Everi (EVRI)

• Buyer: Apollo (APO)
• Consideration: $14.25
• Spread: 10%
• Exp. Closing: Q3’25
• Main Risk: Prolonged timeline.

Everi, a manufacturer and supplier of slot machines and ancillary software to casino operators, is set to be acquired by the private equity firm Apollo. The spread is smotly driven by the prolonged timeline with merger expected to close only in Q3 of 2025. Neither regulatory nor shareholder approval are likely to pose any issues. Immediately after the acquisition closes, Everi will merge with IGT’s gaming business, which is also being bought out by Apollo. Before the Apollo bid, Everi was set to merge with the same spun-off gaming operation of IGT. As of May 23, the HSR waiting period had expired, meaning the FTC had approved the previous merger structure. It is unlikely that anything has changed from a regulatory standpoint with Apollo entering the picture. Shareholder approval is also expected to be smooth, given that EVRI is getting acquired at a 60% premium to pre-announcement levels.

PlayAGS (AGS)

• Buyer: Brightstar Capital Partners
• Consideration: $12.5/share
• Spread: 10%
• Exp. Closing: 2024
• Main Risk: Prolonged timeline.

Slot machine provider, PlayAGS, is being acquired by the PE firm Brightstar Capital Partners. The key reason for the spread is the prolonged timeline with the transaction is expected to close in Q2 of 2025. There is also a slight risk of shareholder opposition. Just a few months ago, Emmett Investment Management (owns 1.5%) opposed the deal, claiming it “fails to reward stockholders for the strong performance AGS has already demonstrated and fails to account for the company’s significant potential.” However, the offers comes at a large 50% premium, at 5-year highs, and is in line with the buyout valuation of the peer, EVRI.

Spirit AeroSystems (SPR)

• Buyer: Boeing (BA)
• Consideration: $37.25/share in BA stock
• Spread: 10%
• Exp. Closing: H2’25
• Main Risk: Prolonged timeline + uncertain consideration.

Leading aerostructures supplier Spirit AeroSystems, which was previously spun off from Boeing, is set to be reacquired by Boeing. Long closing timeline (expected in the second half of 2025) and the potential adjustments to the merger consideration add to spread on this transaction. The offer will remain at $37.25/share in Boeing stock if the BA price stays between $149 and $206.94/share. Since the announcement of the transaction, BA’s price has declined by 15% to $163/share, not far from lower limit of the range when the consideration will be fixed in BA shares and result in lower payout for SPR shareholders in dollar terms. Regulatory risks are unlikely to pose problems, as Spirit AeroSystems has already committed to multiple divestitures, including selling part of the business to Airbus.

Asensus Surgical (ASXC)

• Buyer: Karl Storz
• Consideration: $0.35/share
• Spread: 9%
• Exp. Closing: Q3’24
• Main Risk: Lack of quorum for approval + large downside.

Asensus Surgical is being taken private by the large German medical device manufacturer Karl Storz. The primary reason for the spread is the need for shareholder approval and the potential downside if the merger fails. Just a few days ago, the company was forced to adjourn shareholder meeting to August 20 due to insufficient turnout. Only about 52% of shareholders voted at the meeting, with a large majority of them in favor of the merger. However, more than 50% of the shares outstanding need not only participate but vote in favor. If the company fails to obtain the necessary approvals, the downside could be significant, as the company is running out of cash.

ASXC is covered in more detail on SSI here.

Discover Financial Services (DFS)

• Buyer: Capital One Financial Corporation (COF)
• Consideration: 1.0192 COF stock
• Spread: 18%
• Exp. Closing: Q1’25
• Main Risk: Regulatory approval.

Payment network and credit card issuer Discover Financial is getting acquired by Capital One in an all-stock transaction. The spread can largely be explained by the required regulatory approvals from the Fed, OCC, as well as the DOJ. Multiple political figures, along with the NCRC and dozens of advocacy groups, are urging regulators to block the transaction. Meanwhile, the company has already been hit with a class action lawsuit claiming that the proposed merger would reduce competition. At a public meeting held by the OCC, Capital One committed $265bn to lending, philanthropy, and investment aimed at improving access for underserved consumers if the takeover goes through. However, most of the stakeholders involved remain skeptical of this merger, dismissing the proposed financing plan from Capital One merely as a PR stunt. The primary concern continues to be the concentration in the consumer loan market. Currently, 80% of the credit card loan market is held by 10 players, with COF and DFS ranking 4th and 6th in size. The combined company would be the largest issuer of credit card loans in the US.