These Dealmakers Are About to Hand Us Healthy Returns
Get this for pathetic…
The latest yields on money market funds and 10-year Treasury bonds crawl in at 0.46% and 2.47%, respectively.
There isn’t an investor in the world who’d be content with those measly returns.
That’s exactly why I’ve spent the better part of a year sleuthing out a host of higher-paying opportunities.
The merger arbitrage market – the ultimate dealmakers’ market – certainly qualifies as one of them.
Granted, these deals carry more risk. But we can offset the risk by investing a smaller amount in each one.
And as I demonstrated a few weeks ago, the payoff can be significant if we reinvest the same principal in consecutive deals. A yield of 30% or more over the course of the year, in fact.
With that in mind, here are two fresh opportunities to put on your watchlist…
On June 12, India’s Apollo Tyres Ltd. announced that it was buying Ohio’s Cooper Tire & Rubber Co. (CTB).
The cash purchase price of about $2.2 billion works out to $35 per share, and the deal will form one of the world’s largest tire makers.
At first, though, investors weren’t sure about the cross-border deal. And it was reflected in CTB shares trading about 12% below the offer price at one point. That’s a big spread.
However, this is par for the course when it comes to foreign companies buying their U.S. counterparts. For example, the same sentiment prevailed immediately after Tata Motors’ (TTM) announced that it was buying Jaguar Land Rover from Ford (F) in 2008.
But investors ultimately came to their senses – and the Apollo-Cooper Tires deal is no exception.
In recent weeks, investors have realized that Apollo’s motivation isn’t just a case of a foreign buyer relocating a high-cost U.S. business to a low-cost economy in order to increase profits.
Apollo actually wants Cooper executives to keep leading the company. It also plans to keep operating all the existing Cooper facilities, per the terms of the union agreements.
Instead, it’s a strategic move. The two companies have virtually no geographic overlap, so the acquisition represents an efficient way for Apollo to grow into a global brand and market leader. Practically overnight.
And the market has responded.
Having hit a low of $30.36 on June 21, CTB shares have bounced back above $33. This underscores investors’ confidence in the deal being completed.
Speaking of which, the deal is set to close by the end of the year, pending shareholder and regulatory approval.
At current prices, CTB shares trade at about a 4% discount to the offer price. Remember, our minimum yield requirement is 5%, so wait for a pullback to $33.34 (or lower) before entering a position.
Now, on to our second opportunity…
A Friendly Chinese Merger
Last Friday, Chinese semiconductor company Spreadtrum Communications (SPRD) agreed to a sweetened buyout offer from Tsinghua Unigroup Ltd. – a Chinese state-owned company, which is backed by Tsinghua University.
Terms of the deal call for shareholders to receive $31 per share in cash upon its closing.
Given that this is a friendly merger between countrymen, so to speak – and since Tsinghua already upped its offer – it’s unlikely that a higher bid will emerge from another suitor.
Needham & Co.’s Quinn Bolton agrees, saying, “Financial advisor Morgan Stanley has likely [already] reached out to other potential strategic buyers.” So if another company wanted to make an offer, it would have done so by now.
How do we grab a piece of the action here?
At current prices, Spreadtrum shares are trading at about a 4.3% discount to the offer price. Again, that’s slightly below our required 5% yield. So let’s sit tight and wait for an opportunity to pick up shares for $29.53 or less in the coming weeks.
And I’ll be sure to alert you to any other compelling merger arbitrage opportunities, as they materialize.
Ahead of the tape,