StockData.org - Arbitrage Opportunities

The banks at the heart of the Hunstman deal are backtracking on their commitment to fund the merger. Acquirer Hexion is suing those banks to force them to fund the deal. There are some big financial penalties for Hexion if they cannot complete the deal, so they have some serious motivation to sue those banks.

The banks say the combined companies will not be solvent and thus should not be required to fund the deal. In rebuttal, Huntsman has obtained an opinion from American Appraisal that the merged companies will in fact be solvent:

American Appraisal found that the combined Hexion-Huntsman company would satisfy all of the solvency tests commonly used in transactions of this nature.

Conclusion:

Some comments from around the web feel the banks do not have a sound footing for not funding the deal. The Hexion lawsuit would sort of reaffirm this. However, I still feel that all parties will end up settling and the deal price will be somewhat lower than the original $28/sh. I am thinking $20/sh will happen. I still have an M&A Status of Buy for this one.

I previously wrote about this deal here.

Sources:

Reuters article on the lawsuit by Hexion

YourPetrochemicalNews.com article about the solvency opinion

Nice recap on the Hexion lawsuit at NYT

From an article in Barrons today:

The company’s bid for NRG Energy seems risky without enough reward.

and

…the deal is only modestly accretive to Exelon earnings leading us to question the long-term benefit to shareholders. Meanwhile, the challenges to successfully executing the transaction are considerable.

For more on this deal, see my recent blog post with a number crunch and other information.

Target: Genentech, Inc (DNA)

Buyer: Roche Holding AG

Footing: Unfriendly, nothing agreed upon yet.

The company flexed its financial muscles with the Genentech bid in July, holding firm to its $89 per share offer for the 44 percent it does not already own, even though it was rejected as undervaluing the U.S. biotech company. - Reuters via NYT

Deal price: $89/sh

Current price of DNA: $84.04

Conclusion:

The arbitrage spread looks good. Add to that the fact that DNA rebuffed the July offer as undervalued, I think the offer price could go higher. When it was originally rejected the price of DNA went up to $99/sh. Even though the footing is still unfriendly, Roche is affirming is commitment to buy the remaining shares:

“I would like to reaffirm that we remain committed to the deal and we aim for a negotiated settlement,” Roche Chief Executive Severin Schwan, from Reuters via Forbes

I have my status as WATCH, but it is close to a BUY (Ed. note 11/18/2008: I have since changed my status on this one to a BUY). If this deal goes, I think it might be $100/sh. Here’s a snippet from back Aug 2008 in NYT:

Some analysts say $105 a share would be fair, though Geoffrey Meacham of JPMorgan said Wednesday that Roche might need to pay at least $110.

Sources:

Reuters article via NYT article

Same Reuters article via Forbes.com

NYT article about the first offer that was rejected

It looks like the ImClone deal might be making strides to get completed. I mentioned last week that I thought the deal was in danger of getting done. It was $65/sh then…. now it is above $67… the spread is closing.

From this article fin TheStreet.com:

Eli Lilly said Tuesday that it has commenced a tender offer for all outstanding shares of ImClone Systems at $70 a share.

ImClone’s board unanimously approved Lilly’s proposal and recommended shareholders tender their shares in the offer. Unless extended, the tender and any withdrawal rights to which ImClone’s shareholders might be entitled expire at midnight EST Nov. 20.

Looks like Hexion and Apollo are now going to try and complete the Huntsman (HUN) deal. At HUN’s current trading price, if the deal goes through at the original buyout price, the ROI is huge.

Target: Huntsman Corp. (HUN)

Buyer: Hexion and Apollo Management LP

Deal: $28 cash per share

Target share price: $12

Closes on: ??

Backstory:

Hexion/Apollo have wanted out of the deal, but recently a judge ordered them to complete it. Since then, Apollo has pledged $540M to Hexion to help get the deal done.

Conclusion:

With Apollo throwing more money at and the judge making them do it, I think the odds are this will get done. The big risk here is: WHEN. Also, I have not read the judge’s ruling, but I wonder if the original deal price of $28/sh might get negotiated down.

Since I am not overly concerned about the deal getting done soon, I will buy if the entry point is is HUN @ $12 or less.

Sources:

Key developments from Reuters

MercuryNews (article about judge requiring the deal to go through)

Forbes (article about latest cash infusion from Apollo)

TheDeal.com (article on Hexion’s ability to complete the deal and potential damages filed by HUN)

Some deals I am avoiding right now:

• Republic Services - Waste Management (more)
• Diebold - United Technologies (deal withdrawn)
• Alltel - Verizon Wireless

Underscoring the severity of the debt crisis, several sources said that Verizon Wireless has not been able to get fully committed financing to back the acquisition of Alltel. - TheDeal.com article

Target: LNCB - Lincoln Bancorp ($12.50)

Acquirer: FRME - Commerce National Bank ($21)

THE DEAL: Merger letter to shareholders on this one says:

In exchange for your Lincoln common shares, you will have the opportunity to choose either 0.7004 shares of First Merchants common stock or $15.76 in cash for each Lincoln common share you own. However, no more than 3,576,417 shares of First Merchants’ common stock and no more than $16,800,000 in cash may be paid to all Lincoln shareholders in the merger, and there may be re-allocations of cash and stock to certain Lincoln shareholders if either threshold is exceeded

Facts:

• 5,319,731 shares outstanding of LNCB stock

Scenario 1

Currently, FRME stock is $21/sh, or $14.70 per share of LNCB you own.

At today’s FRME price, you’d take the cash deal. BUT– the deal has a cash payout max of $16,800,000. That’s just 1,065,989 shares. LNCB has 5,319,731 outstanding, so the remaining 4,253,741 shares would be required to get 0.7004 per share at the current FRME price of $21… or $14.70/sh.

I assume that all common shares are equal and that they would equally assign the lower priced shares to everyone (a big assumption, since they have not released these types of details of yet). If true, at today’s price, 79.9% (4,253,741/5,319,731) of your shares would get $14.70/sh, and 20.1% (1,065,989/5,319,731) of your shares would get $15.76/sh.

N = number of shares I own

My payout = ((N*0.799)*14.70) + ((N*0.201)*15.76)

OR

N*14.91

If I own 100 shares, that would be $1,491.

If I bought 100 shares today at $12.50, they would cost me $1,250 (less commission). That would net me $241, or an ROI of 19.3%.

Scenario 2

Let’s assume FRME stock goes to $23.50/sh at deal time (everyone will want shares of FRME instead of cash). With 5,319,731 shares of LNCB outstanding, 1,743,314 shares will have to take the cash deal of $15.76/sh (remember, the deal has a max share payout of 3,576,417 shares of FRME stock). That’s $27,474,628, or $10,674,627 more than the $16,800,000 deal cash cap will allow. In other words, in this scenario, the deal only allows for 1,065,989 shares of LNCB to be exchanged for cash. This means the deal has to be adjusted downward somehow to allow for all remaining LNCB shares to bought out…I am not sure how that works… maybe the deal price is dropped to say $9.63 per share? I assume a future SEC filing/proxy statement will detail how this will work.

In that case, 67.2% of the shares get FRME stock, and 32.8% *must* take cash.

N = number of shares I own

My payout = ((N*0.672)*23.5) + ((N*0.328)*9.63)

OR

N*18.95

If I own 100 shares, that would be $1,895.

If I bought my shares today at $12.50, it would cost me $1,250 (less commission). That would net me $645, or an ROI of 51.6%.

Comments & Conclusion

This deal is a friendly merger. They have scheduled it to execute by the end of 2008. I think this deal will be done by 12/31/2008.

The deal hinges on the price of FRME stock. The higher FRME goes before the deal is struck, the better. Based on all of my assumptions, the lowest that FRME stock can go before I start losing money on this deal is $16.70.

If I want a decent ROI (above 10%) and I buy LNCB at $12.50, then price of FRME needs to be above $19/sh. Right now, FRME is $21/sh, so I my current M&A Status = BUY. If LNCB goes lower, so much the better.

Sources:

columbus.bizjournals.com article

SEC filing of letter to shareholders

Target: ImClone Systems (IMCL)

Deal: $70/share

Current Share Price (10/10/2008): $65

Acquirer: Eli Lilly and Co.

Notes:

The $70/sh offer beat out another offer of $62/sh from Bristol-Myers Squibb.

Current arbitrage spread: $5/sh

Seems like a consensus is growing that this deal might not happen.

But the deal immediately raised eyebrows when Lilly executives revealed that as much as half the cash will be raised through debt… -TheDeal.com

Pretty good profit potential– however, that is certainly due to lingering doubts about the deal.  Using debt to finance much of the deal (see quote above), when credit markets are the way they are right now, might not be something that is feasible.  We’ll need to keep watching this one.

My M&A Status on this one: WATCH

Sources:

“No love for Lilly” (TheDeal.com)

Article describing why Lilly wants ImClone (TheStreet.com)

More info on the deal (NYT)

Private equity fund Mithras Capital (owns 1.9 million YHOO shares, or 0.14 percent) proposed a new deal this week: Sell Yahoo to Microsoft for $22 a share.  Current trading price: $12.29.  That’s quit a premium– looks like someone at Mithras is smoking something.

Based on the comments at the press release blog post (see link below), looks like most people think this proposal lacks merit.  I have to agree.

Sources:

Press Release

Reuters/NYT