Merger Arbitrage Mondays – Frontyard Residential Gets Another Suitor

Merger activity increased last week with six new deals announced and one active deal completed. You can find all the active deals listed below in our Merger Arbitrage Tool (MAT) that automatically updates itself during market hours.

One of the new deals announced was the acquisition of Front Yard Residential Corporation (RESI) by Pretium and Ares Management in an all cash deal worth $2.4 billion. As arbitrageurs might remember, this is the second go around for RESI after their $2.3 billion acquisition by Amherst Residential at a price of $12.50 per share failed in May of this year.

When the first deal for RESI failed, we wrote the following:

Front Yard Residential Corporation (RESI) and Amherst Residential mutually terminated their merger agreement. Amherst agreed to not only pay RESI a $25 million termination fee but also agreed to purchase $55 million worth of RESI stock at $12.50 per share. They also extended RESI a two-year unsecured $20 million loan facility. Deals that fall apart can provide opportunities especially on account of forced selling by funds. I looked into RESI after the deal broke and the subsequent drop to the $8 level but came away unimpressed. With a position in American Homes 4 Rent (AMH), I did not want further exposure in this segment, especially when it came to a sub-par operator like RESI.

Quite clearly I was very wrong. Ares Management found significant value where I did not and agreed to acquire RESI for $13.50 per share in cash. The macro environment has changed since I wrote this and there has been an exodus from cities and apartments to single family homes that has benefited both RESI and American Homes 4 Rent (AMH). Nevertheless, I am glad the situation worked out well in the end for shareholders.

A similar situation that has worked out in spades was the failed acquisition of Pacific Biosciences (PACB) by Illumina. The deal was announced on November 1, 2018 with Illumina agreeing to pay $8 per share in cash for the genome sequencing company. By the time I wrote about the deal in a post titled “A Duo Of Merger Arbitrage Opportunities Offering Double Digit Annualized Returns” in late December 2018, the spread on the deal had increased on antitrust concerns. I provided an update on the deal in mid-2019 and by then the spread had widened to nearly 20% and the stock was trading near $6.73. I wrote the following in that update,

Assuming the PacBio deal does not go through, it is possible but unlikely that the stock drops to the pre-deal price of $4.51. The reason I say unlikely is because PacBio is going to benefit from an increase in revenue from customers that were waiting for the company to release a new product called Sequel II. The five analyst that follow the stock expect revenue to increase nearly 40% next year to $143.63 million. Some analysts like Stephen Simpson estimate the company is worth $6.50 on a stand alone basis as discussed in this article. I have been reading Mr. Simpson’s articles for the better part of a decade and he usually has a pretty good handle on valuing companies. However I would apply a discount to his valuation on account of PacBio’s history of operating losses and missed earnings expectations. Assuming a stand alone price of $6, the downside appears to be 73 cents while the upside from the deal completing is $1.27, providing for an asymmetrical risk/reward situation.

If the deal breaks, there is likely to be forced selling by arbitrageurs that could take the price down below the company’s perceived intrinsic value and could provide another opportunity to start or add to a position.

I am going to start a position in PacBio after this premium post is published but will size the position smaller than I tend to size most of my arbitrage positions.

The deal failed on January 2, 2020 and PacBio went on to drop to as low as $2.20 in March before rebounding sharply the rest of the year. The stock closed at $13.90 on Friday and over the last several weeks, I slowly exited my position.

Mergers don’t often fail but when they do, they can provide a good opportunity to investors who are willing to pick up the pieces after the dust settles. Obviously one needs to understand the situation and the potential prospects of the company going forward. I got PacBio right but was mistaken about RESI’s prospects.

There was one new deal announced in the Deals in the Works section last week.

Weekly Spread Changes:

The table below shows weekly spread changes between October 16, 2020, and October 23, 2020.

Symbol Quote Acquiring
Company Quote
Last Week
Spread Change
EIDX 73.29 BridgeBio Pharma, Inc. (BBIO) 39.66 -0.04% -3.83% 3.79% Special Conditions
FIT 6.95 Google LLC (GOOG) 1641 5.76% 3.81% 1.95% All Cash
MR 5.78 Southwestern Energy Company (SWN) 3.14 1.35% -0.04% 1.39% All Stock
ATV 20.2 First Ostia Port Ltd. (N/A) 0.00 3.96% 2.94% 1.02% All Cash
MOBL 7.03 Ivanti, Inc. (N/A) 0.00 0.28% -0.70% 0.98% All Cash
TAT 0.2574 TAT Holdco LLC and TAT Merger Sub LLC (N/A) 0.00 -49.49% -47.96% -1.53% All Cash
FORK 2.37 Fuling ParentCo Inc. (N/A) -0.84% 1.08% -1.92% All Cash
SUNW 2.86 The Peck Company Holdings, Inc. (PECK) 6.99 -54.74% -52.48% -2.26% All Stock
NEWA 3.68 Crouching Tiger Holding Limited (N/A) 0.00 -0.82% 2.24% -3.06% All Cash
GNW 3.79 China Oceanwide Holdings Group Co., Ltd. (N/A) 43.27% 54.70% -11.43% All Cash

Deal Statistics:

Total Number of Deals Closed in 2020 114
Total Number of Deals Not Completed in 2020 16
Total Number of Pending Deals
Cash Deals 34
Stock Deals 15
Stock & Cash Deals 3
Special Conditions 3
Total Number of Pending Deals 55
Aggregate Deal Consideration $721.98 billion

New Deals:

  1. The merger of Concho Resources (CXO) and ConocoPhillips (COP) for $13.32 billion in an all stock deal. Under the terms of the agreement, each share of Concho Resources common stock will be exchanged for a fixed ratio of 1.46 shares of ConocoPhillips common stock. We added CXO as a potential deal to the Deals in the Works section on October 14, 2020, and the price after the news of the potential deal came out was $49.56.
  2. The acquisition of Front Yard Residential Corporation (RESI) by Pretium and Ares Management for $2.4 billion or $13.50 per share in cash.
  3. The acquisition of BioSpecifics Technologies (BSTC) by Endo International (ENDP) for $540 million or $88.50 per share in cash.
  4. The acquisition of Parsley Energy (PE) by Pioneer Natural Resources Company (PXD) for $7.6 billion in an all stock deal. Under the terms of the agreement, Parsley shareholders will receive a fixed exchange ratio of 0.1252 shares of Pioneer common stock for each share of Parsley common stock owned. We added PE as a potential deal to the Deals in the Works section on October 14, 2020, and the price after the news of the potential deal came out was $10.88.
  5. The acquisition of PNM Resources (PNM) by Avangrid (AGR) for $8.05 billion or $50.30 per share in cash.
  6. The acquisition of CONSOL Coal Resources (CCR) by CONSOL Energy (CEIX) for $312.29 million in an all stock deal. Under the terms of the agreement, CEIX will acquire all of the approximately 10.9 million outstanding CCR common units that it does not already own at a fixed exchange ratio of 0.73 shares of CEIX common stock for each publicly held CCR common unit.

Deal Updates:

  1. On October 20, 2020, Virtusa Corporation (VRTU) announced that the special meeting of stockholders of Virtusa Corporation will be held virtually on November 20, 2020.
  2. On October 20, 2020, Fuling Global (FORK) announced that the special meeting of stockholders of Fuling Global will be held on November 20, 2020.
  3. On October 23, 2020, Bitauto Holdings Limited (BITA) announced that the Company’s shareholders voted in favor of the proposal to authorize and approve the previously announced agreement and plan of merger with Morespark Limited.
  4. On October 23, 2020, Sirius International Insurance Group (SG) announced that the special meeting of stockholders of Sirius International will be held on November 23, 2020.
  5. On October 23, 2020, Eaton Vance (EV) announced that the special meeting of stockholders of Eaton will be held virtually on November 12, 2020.
  6. On October 23, 2020, the Department of Justice announced that Waste Management (WMwill be required to divest 15 landfills, 37 transfer stations, 29 hauling locations, over 200 waste collection routes, and other assets in order to proceed with its $4.6 billion acquisition of Advanced Disposal Services (ADSW).

Closed Deals:

  1. The acquisition of Immunomedics (IMMU) by Gilead Sciences (GILD) on October 23, 2020. It took 40 days for this deal to be completed.

Top 10 deals with largest spreads:

Symbol Announced
Profit Annualized
GNW 10/23/2016 China Oceanwide Holdings Group Co., Ltd. (N/A) $5.43 $3.79 11/30/2020 43.27% 438.73%
GSUM 10/01/2020 Gridsum Corporation (N/A) $2.00 $1.8 03/31/2021 11.11% 25.83%
TIF 11/25/2019 LVMH Moët Hennessy Louis Vuitton SE (LVMUY) $135.00 $123.54 12/31/2020 9.28% 50.54%
MXIM 07/13/2020 Analog Devices, Inc. (ADI) $78.25 $72.87 06/30/2021 7.38% 10.86%
CBMG 08/12/2020 CBMG management (N/A) $19.75 $18.41 12/31/2020 7.28% 39.65%
WLTW 03/09/2020 Aon plc (AON) $223.89 $209.75 06/30/2021 6.74% 9.93%
FIT 11/01/2019 Google LLC (GOOG) $7.35 $6.95 01/31/2021 5.76% 21.44%
DOYU 10/12/2020 HUYA Inc. (HUYA) $15.83 $15.07 06/30/2021 5.02% 7.39%
ACIA 07/08/2019 Cisco Systems, Inc. (CSCO) $70.00 $67.29 12/31/2020 4.03% 21.94%
ATV 10/12/2020 First Ostia Port Ltd. (N/A) $21.00 $20.2 12/31/2020 3.96% 21.58%

List of all pending deals:

The list of all pending deals is only available to InsideArbitrage Premium and Plus members.

Disclaimer: I have a long position in Otelco (OTEL). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.

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