September 29, 2021 — The much-ballyhooed expectation of an antitrust crackdown within M&A has yet to commence in earnest.
However, in September, the Surface Transportation Board’s (STB) unfavourable ruling against Canadian National Railway brought the bidding war for Kansas City Southern to an abrupt halt.
While it would have been a big win for arbitrageurs had the STB allowed Canadian National’s bid for Kansas City Southern to proceed, the regulator’s stance was not unexpected. Nonetheless, the ruling permitted Kansas City Southern to be coaxed into the arms of competing suitor Canadian Pacific Railway, whose lower-priced bid won the day due to its lessened regulatory risk.
Since the last Merger Monitor, there have been 11 announced public M&A deals worth an aggregate $37.2 billion in the U.S. and 4 in Canada totaling $1.1 billion.
Recently, there has been no central theme for the consolidation, with freshly announced deals covering nearly all sectors, sizes, valuations and premia.
The highest premia announced included Spire Global’s C$204 million acquisition of exactEarth at a stunning 169.0% premium and Sanofi’s $1.8 billion takeover of Kadmon Holdings at a 79.2% premium — a high figure that is expected in biotech deals.
Despite a “steady as she goes” environment of consistent deal flow and successful deal closings, merger arbitrage yields remain high, both on an absolute and relative basis.
For example, the average merger arbitrage opportunity yields nearly 9%, while the average junk bond yields south of 4%. An almost 500 basis point spread between arbitrage yields and junk bond yields showcases the more attractive opportunity set that income-seeking investors can attain by pursuing alternative fixed income strategies, if their mandate allows them to allocate to arbitrage.
Nonetheless, as the autumn leaves fall and the warm weather sustains itself well past our early winter expectations, the current higher than expected arbitrage yields offer the opportunity for investors to make hay while the sun shines.
The below AlphaRank Merger Monitor represents Accelerate’s proprietary analytics database on all announced liquid U.S. mergers. The AlphaRank Merger Arbitrage Effective Yield represents the average annualized return of all outstanding merger arbitrage spreads and is typically viewed as an alternative to fixed income yield.
Each individual merger is assigned a risk rating:
- AA — a merger arbitrage rated ‘AA’ has the highest rating assigned by AlphaRank. The merger has the highest probability of closing.
- A — a merger arbitrage rated ‘A’ differs from the highest-rated mergers only by a small degree. The merger has a very high probability of closing.
- BBB — a merger arbitrage rated ‘BBB’ is of investment grade and has a high probability of closing.
- BB — a merger arbitrage rated ‘BB’ is somewhat speculative in nature and has a greater than 90% probability of closing.
- B — a merger arbitrage rated ‘B’ is speculative in nature and has a greater than 85% probability of closing.
- CCC — a merger arbitrage rated ‘CCC’ is very speculative in nature. The merger is subject to certain conditions that may not be satisfied.
- NR — a merger rated NR is trading either at a premium to the implied consideration or a discount to the unaffected price.
The AlphaRank merger analytics database is utilized in running the Accelerate Arbitrage Fund (TSX: ARB), which may have positions in some of the securities mentioned.
* AlphaRank is exclusively produced by Accelerate Financial Technologies Inc. (“Accelerate”). Visit AccelerateShares.com for more information. Disclaimer: This research does not constitute investment, legal or tax advice. Data provided in this research should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this research is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Accelerate may have positions in securities mentioned. Past performance is not indicative of future results.