Merger Arbitrage Mondays – Front Yard Gets Another Boost

Merger activity decreased last week with one new deal announced and one deal completed. With only eleven new deals announced, deal activity moderated significantly during the month of November.

According to the Wall Street Journal, S&P Global (SPGI) is in advanced talks to acquire IHS Markit (INFO) for about $44 billion. If announced on Monday, this would be one of the largest deals this year.

Incorporated in 1906, The Goldfield Corporation is a leading provider of electrical construction and maintenance services in the energy infrastructure industry primarily in the Southeast and mid-Atlantic regions of the United States and Texas and also a real estate developer of residential properties on the east coast of Florida. On November 24, 2020, the company entered into a definitive agreement to be acquired by First Reserve at a significant premium of 64% to its closing price the previous day.

Another significant highlight from last week was Front Yard Residential Corporation (RESI) and Pretium and Ares Management Corporation (ARES) amending their merger agreement. This amendment was negotiated after Front Yard received an unsolicited binding proposal from an unaffiliated third party to acquire all outstanding shares of Front Yard common stock. According to the press release, the revised transaction price represents a 63% premium over Front Yard’s closing share price on October 16, 2020, the last trading day prior to the date on which the company entered into the merger agreement.

Front Yard has become the gift that keeps giving. Four weeks ago when the deal between Front Yard and Ares Management was struck, I wrote the following about the deal,

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.

You can find all the active deals listed below in our Merger Arbitrage Tool (MAT) that automatically updates itself during market hours.

There were two new deals announced in the Deals in the Works section last week.

Weekly Spread Changes:

The table below shows weekly spread changes between November 20, 2020, and November 27, 2020.

Symbol Quote Acquiring
Company
Acquiring
Company Quote
Current
Spread
Last Week
Spread
Spread Change
Weekly
Deal
Type
GNW 4.15 China Oceanwide Holdings Group Co., Ltd. (N/A) 30.84% 17.28% 13.56% All Cash
FBSS 17.12 Virginia National Bankshares Corporation (VABK) 27.5 8.43% 3.09% 5.34% All Stock
HPR 10.94 Bonanza Creek Energy, Inc. (BCEI) 24.21 -74.77% -76.69% 1.92% All Stock
DOYU 13.97 HUYA Inc. (HUYA) 21.49 12.30% 10.69% 1.61% All Stock
OSB 37.02 West Fraser Timber Co. Ltd. (WFT.TO) 72.3 1.52% 0.00% 1.52% All Stock
TAT 0.24615 TAT Holdco LLC and TAT Merger Sub LLC (N/A) -47.19% -45.72% -1.47% All Cash
LINX 6.77 StoneCo Ltd. (STNE) 73.28 -7.68% -6.02% -1.66% Special Conditions
MVC 8.48 Barings BDC, Inc. (BBDC) 8.75 1.67% 3.68% -2.01% Cash Plus Stock
CBMG 18.7 CBMG management (N/A) 5.61% 7.92% -2.31% All Cash
EIDX 90 BridgeBio Pharma, Inc. (BBIO) 49.13 -18.60% -9.71% -8.89% Special Conditions

Deal Statistics:

Total Number of Deals Closed in 2020 124
Total Number of Deals Not Completed in 2020 16
Total Number of Pending Deals
Cash Deals 37
Stock Deals 17
Stock & Cash Deals 3
Special Conditions 3
Total Number of Pending Deals 60
Aggregate Deal Consideration $814.49 billion

New Deals:

  1. The acquisition of The Goldfield Corporation (GV) by an affiliate of First Reserve for $211.12 million or $7.00 per share in cash.

Deal Updates:

  1. On November 23, 2020, Front Yard Residential Corporation (RESI) announced that it has amended its definitive merger agreement with Pretium and Ares Management Corporation (ARES) to increase the consideration payable to holders of outstanding shares of Front Yard stock to $16.25 per share in cash from $13.50 per share in cash.
  2. On November 23, 2020, The Federal Trade Commission (FTC) has granted early termination of the required waiting period under the Hart-Scott-Rodino Act with respect to the acquisition of Dunkin’ Brands Group (DNKN) by Inspire Brands.
  3. On November 24, 2020, Shareholders of Sirius International Insurance Group (SGapproved the company’s merger with Third Point Reinsurance (TPRE) at a special meeting of shareholders.
  4. On November 23, 2020, Varian (VARreceived CFIUS Approval.
  5. On November 24, 2020, shareholders of MobileIron (MOBLapproved the company’s merger with Ivanti at a special meeting of shareholders.
  6. November 27, 2020: According Seeking Alpha, the China’s NDRC may have granted regulatory approval for China Oceanwide to move forward in its transaction for Genworth (GNW). The NDRC’s approval was one of the last conditions required before the deal could be completed.

Closed Deals:

  1. The acquisition of Fuling Global (FORK) by Fuling ParentCo on November 23, 2020. It took 83 days for this deal to be completed.

Top 10 deals with largest spreads:

Symbol Announced
Date
Acquiring
Company
Closing
Price
Last
Price
Closing
Date
Profit Annualized
Profit
GNW 10/23/2016 China Oceanwide Holdings Group Co., Ltd. (N/A) $5.43 $4.15 11/30/2020 30.84% 11257.83%
GSUM 10/01/2020 Gridsum Corporation (N/A) $2.00 $1.74 03/31/2021 14.94% 44.71%
DOYU 10/12/2020 HUYA Inc. (HUYA) $15.69 $13.97 06/30/2021 12.30% 21.07%
IPHI 10/29/2020 Marvell Technology Group Ltd. (MRVL) $170.79 $152.21 12/31/2021 12.21% 11.22%
XLNX 10/27/2020 Advanced Micro Devices, Inc. (AMD) $150.26 $137.49 12/31/2021 9.29% 8.54%
FBSS 10/01/2020 Virginia National Bankshares Corporation (VABK) $18.56 $17.12 06/30/2021 8.43% 14.44%
WLTW 03/09/2020 Aon plc (AON) $223.11 $209.55 06/30/2021 6.47% 11.09%
CBMG 08/12/2020 CBMG management (N/A) $19.75 $18.7 12/31/2020 5.61% 64.05%
MXIM 07/13/2020 Analog Devices, Inc. (ADI) $86.78 $82.41 06/30/2021 5.31% 9.09%
NEWA 10/02/2020 Crouching Tiger Holding Limited (N/A) $3.65 $3.53 06/30/2021 3.40% 5.83%

List of all pending deals:

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

Conclusion:

Merger Arbitrage is a strategy where you are constantly picking up a few pennies in front of a bulldozer with about a 5% chance of getting run over by the bulldozer when a deal fails. On the other hand, we also see deals where there are multiple bids or bidding wars that push the price of the deal well above the original price. Front Yard is one such example and another example was the bidding war between Verizon and AT&T for Straight Path Communication where Verizon’s final winning bid of $184/share was significantly above the $95.63 deal AT&T had originally struck for Straight Path.

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.

Connect with me on LinkedIn: http://www.linkedin.com/in/asifsuria or follow me on Twitter@asifsuria

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