October 27, 2020 – The biotech and technology sectors have dominated M&A coming out of the pandemic-led bear market as companies seek growth in a recessionary environment.
This dynamic has changed over the past month as we saw the beginning of a new trend in mergers and acquisitions, which is consolidation in the oil patch.
Since last month’s Merger Monitor, seventeen U.S. mergers have been announced, representing an aggregate value of $73.8 billion. Of these transactions, only three were in the oil and gas sector, however, these energy deals represented over $26 billion of value. Last month, in contrast, there were only ten M&A transactions, representing an aggregate value of $38.5 billion, with zero energy deals.
Notable oil and gas M&A over the past month include:
- Devon Energy’s $5.7 billion “merger of equals” with WPX Energy, with a measly 2.6% premium
- ConocoPhillips’ $13 billion acquisition of Concho Resources at a 15.4% premium
- Pioneer Natural Resources’ $7.6 billion deal with Parsley Energy at a 7.9% premium
Nonetheless, these energy deals represent consolidation for survival, not growth, and therefore targets are not getting rewarded with sizable control premiums. All of the oil and gas mergers were announced at premiums substantially lower than the present average 34.2% deal premium. This stands in stark contrast to the large number of biotech deals we have seen lately, some of which have been executed at premiums exceeding 100%. The steep dichotomy in sentiment between biotech and energy is noteworthy.
Sixteen deals closed over the past thirty days, including several jumbo transactions such as Gilead Sciences’ $21 billion tender offer for Immunomedics, Charles Schwab’s $26 billion merger with TD Ameritrade, Morgan Stanley’s $13 billion deal for E*Trade Financial and Chevron’s $13 billion takeover of Noble Energy.
One notable deal that closed on its terms was PPF Groups’ $2.1 billion acquisition of Central European Media (CETV). The CETV deal was announced pre-COVID, and therefore the deal spread went through severe turbulence in the first quarter’s bear market. I noted that the CETV deal spread was the most insane merger arbitrage I have ever seen in my 13+ years in M&A. On March 16, the spread blew out and stock dropped -55% on no news. The deal was completed on the terms, with no issues and no repricing. This favourable result serves as your periodic reminder that significant inefficiencies still exist in the merger arbitrage space, and enterprising investors can capitalize on these opportunities.
One pre-COVID deal fell apart during the month, which the market expected given the existing litigation between the parties for a deal gone bad. Instead of going through a drawn-out court case (and setting the first MAE precedent in the coronavirus era), Comtech Telecommunications and spurned target, Gilat Satellite settled with Comtech paying Gilat $70 million, or 13.1% of the deal’s value, to agree to call off the deal.
Merger spreads have continued to tighten, and have now returned to pre-COVID levels of around 6%. Given merger arbitrage’s relatively slim potential returns with real downside risk, which are currently less attractive than low-risk SPAC arbitrage yields, the Accelerate Arbitrage Fund (TSX: ARB) currently has only about 30% of its portfolio dedicated to merger arbitrage, with 70% allocated to SPAC arbitrage.
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.