Merger activity ground to a halt last week with no new deals announced and two active deals completed. Merger spreads continued to remain wide for a second week in a row and at one point even AbbVie’s acquisition of Allergan (AGN) was trading at a spread of over 12% as you can see below from our spread history chart for that deal.
With 10 deals trading at spreads of over 25% and 26 deals trading with spreads of over 10%, the merger arbitrage space is rife with both opportunity and risk. If the economic situation deteriorates further and impacted industries are not able to benefit from the massive $2 trillion stimulus package that has now passed both houses of congress, there is a good possibility that several of these deals will fall apart.
Studying the material adverse change (MAC) clause of a merger agreement may not be sufficient, as acquirers could choose to walk away from deals and take their chances in the courts. Paying attention to the kind of acquirer, the macro environment and industry specific issues is very important at this juncture. We wrote the following in last week’s Merger Arbitrage Mondays article about industry specific risks,
As the COVID-19 outbreak escalates globally, we saw significant changes in the spreads for the active deals in our table. Companies belonging to the consumer discretionary sector, like Stein Mart (SMRT), Tiffany & Co (TIF) and Caesars Entertainment Corporation (CZR) had to shut down stores and operations in response to the COVID-19 outbreak.
The Tiffany situation was interesting with the spread on the merger jumping over 20% early last week before settling lower towards the end of the week. There was some chatter about the drop in Tiffany being related to Citadel Investment unwinding its merger arbitrage position after the head of its merger arbitrage desk, Maulin Shah, leaving the company following a bad bet on the Sprint – T-Mobile merger. There was also some chatter about LVMH approaching Tiffany’s board to acquire shares on the open market at a discount, which frankly felt far fetched.