Merger activity was muted during the last week of the year 2021 with no new deals announced and two active deals consummated, one of which was completed just 39 days after the signing of the definitive merger agreement. This month we included a U.S. M&A special year end report in our January 2022 Special Situations newsletter in addition to highlighting two merger arbitrage opportunities as our spotlight ideas for the month. A snapshot of the special report is given below.
During 2021, we saw 16 deals terminated, which was marginally better than the 17 deals that were terminated in 2020 but the news was not all bad. Only 4 deals were terminated on account of regulatory issues. Seven deals were terminated because they received new offers and in many cases Christmas came early because the deals went through bidding wars that lasted multiple rounds. Before Coherent (COHR) terminated its merger agreement with Lumentum (LITE) and finally tied the knot with II-VI Incorporated (IIVI), the deal went through nine rounds of counter offers involving three different parties.
We are seeing something similar play out right now with the acquisition of R.R. Donnelley & Sons Company (RRD). The company has been in the middle of a bidding war between Atlas Holdings and Chatham Asset Management. We had added RRD to our list of potential deals on on October 12, 2021, when Chatham Asset Management, RRD’s largest bondholder offered to acquire the company for $7.50 per share in cash. RRD’s price after this announcement was $6.57. RRD, however entered into an agreement to be acquired by Atlas Holdings. We wrote the following in our Merger Arbitrage post titled: Merger Arbitrage Mondays – R. R. Donnelley To Be Acquired By Atlas Holdings
On November 3, 2021, R. R. Donnelley entered into a definitive merger agreement to be acquired by affiliates of Atlas Holdings for approximately $2.1 billion or $8.52 per share in cash. On the same day, Chatham enhanced its offer to acquire all the common stock of RRD not already owned by Chatham for a range of $9.00 to 9.50 per share in cash. RRD’s price went up to $9.11 after this offer was announced. Under the terms of the merger agreement, RRD may solicit additional acquisition proposals from third parties during a “go shop” period of 25 calendar days from the signing of the merger agreement. Given this bidding war, it is not surprising to see R. R. Donnelley trade at a negative spread of more than 7% to the $8.52 per share acquisition price.
For a company with $1.5 billion in net debt on the balance sheet and twelve continuous quarters of revenue decline before a 6.42% increase in revenue in Q3 2021, it is rather unusual that not just one suitor but two of them are competing to acquire R. R. Donnelley. The go shop period is very short and if the company’s management does not engage with Chatham, shareholders would end up with a sub-optimal outcome.