July 28, 2020 – Despite trading desks armed by skeleton crews as senior staffers take much-needed vacations during the summer stock market doldrums, M&A has rallied back this month from the recent deal drought.
Last month, only five mergers were announced, representing a -69% year-over-year decline in deal activity. As markets continue to recover, and investors’ confidence returns, executives and boards of directors are coming back to the table to do deals.
In July, twelve transactions have been announced, an activity level matching that of July of 2019. No doubt, merger arbitrageurs are welcoming this increase in corporate deal-making activity. The merger market in the U.S. expanded from 39 deals last month to 43 announced transactions currently.
Since the coronavirus emerged in late-February, the market has been pricing in a significantly elevated deal break risk. Thus far, disaster in the market has largely been averted, although there has been a slight uptick in deal terminations.
In a further sign that confidence has returned, and corporate executives are less skittish, July has been the first month of the pandemic in which no transactions have been terminated (knock on wood with four trading sessions left this month). Nonetheless, spreads haven’t fully recovered, and merger yields are still roughly double what they were prior to when the recessionary dynamics began in late February.
Several sizable mergers that were announced pre-COVID successfully closed this month, including First Horizon National’s $4 billion merger with IberiaBank, WillScot’s $2.8 billion acquisition of Mobile Mini and Eldorado Resorts’ massive $17.3 billion takeover of Caesars Entertainment.
After seeing private equity sit out of the markets during the entire bear market and subsequent recovery in the first half of the year, leveraged buyouts have re-emerged with a vengeance. This month, one-third of deals announced featured private equity buyers, including announced buyouts of public corporations by PE firms such as Madison Dearborn Partners and Thoma Bravo. However, private equity confidence seemingly hasn’t fully returned, given that the four buyouts announced this month were all sub-$1 billion in enterprise value. Will we see the return of the massive, multi-billion dollar leveraged buyout? We wouldn’t be surprised to see this happen in the back half of the year.
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.