As we move into the final month of the year, I wanted to look at a few of the best arbitrage trades available. I have already written about both the Sherwin-Williams, Valspar and the Walgreens, Rite Aid deals, but there are more available.
In my experience, the margin of safety with mergers and acquisitions (M&A) is fairly high as long as investors stick to all-cash deals void of major regulatory concerns.
This year alone, there have been 200 completed M&A deals compared to 16 not completed. There are 91 pending deals, with 19 deal offerings greater than 20% annualized profit potential, nine of which are all cash.
Here are the remaining seven:
Apollo Education (APOL, Financial)
A group of private equity firms is buying the company for a cash value of $1.1 billion, $10 per share. The deal is expect to close in the first quarter of 2017 and is good for a 5.26% total return, 85% annualized.
Apollo owns University of Phoenix and other lesser-known learning platforms. The company is being acquired by a group of private equity firms, including The Vistria Group, Apollo Global Management and Najafi Companies. The deal is valued at $1.1 billion and would be a massive win for these private equity firms, considering Apollo has more than $570 million in net cash on the books and is trading on par with the current book value. Scheduled to close in less than month, the deal has a solid margin of safety on the current 50-cent premium.
The chairman and CEO of Trina Solar, Jifan Goa, is looking to buy the company for a cash value of $3.4 billion, $11.60 per share. The deal is expect to close in the first quarter of 2017 and is good for a 28% total return, 85% annualized.
Trina is a solar power products manufacturer and solar system developer based in China with a global distribution network. Trina is a low-cost producer, profitable and has grown from $115 million in sales to over $3.4 billion in just 10 years. Its production costs are now as low as 50 cents per watt, making this a deal worth getting involved in. Even if the deal falls through, the stock is undervalued.
ChemChina is buying Syngenta for a cash value of $43 billion, $96.01 per share. The deal is expected to close in March 2017 and is good for a 27% total return, 273% annualized.
Syngenta, a Swiss pesticides company, is a leader in agricultural crop protection and is working to catch up with entrenched competitors in seeds. With Bayer buying Monsanto, big ag is getting more concentrated. Syngenta is a chemical company composed of sales in herbicides, insecticides and fungicides. This deal was expected to close by the end of the year, but has been pushed back until March 29 by the European Commission for regulatory approval since it represents China's biggest-ever foreign acquisition. Syngenta’s fundamentals are strong with the company generating $1.2 billion a year on $12.8 billion in sales, allowing it to pay out $2.29 per share in dividends, 89% of EPS. With a stock priced at $75.90, the potential is worth the risk. In fact, over 30 hedge funds have Syngenta in their portfolios.
Bayer AG is buying Monsanto for a cash value of $66 billion, $128 per share. The deal is expect to close by the end of 2017 and is good for a 25% total return.
Monsanto has a huge economic moat around it being the leader in the agricultural chemical industry for decades, having created the agri-biotech market it now dominates. The company first commercialized Roundup weed killer in 1976. For example, Syngenta (above) chose to license Roundup Ready 2 Yield for its second-generation soybean offering instead of investing the dollars to develop its own - that is a strong competitive advantage. And, whether this deal closes or not, with the stock at ~$102, Monsanto is a long-term hold.
Genworth Financial (GNW, Financial)
China Oceanwide Holdings is buying Genworth for a cash value of $2.7 billion, $5.43 per share. The deal is expect to close by mid-2017 and is good for a 27% total return.
China Oceanwide is a private, family-owned holding group with a portfolio that includes financial services and insurance products in China, as well as real estate assets globally. Genworth will be a standalone subsidiary of the company.
Ten years ago, Genworth was crushing it. It had $1.3 billion in profit on $10.2 billion in revenue with an annual dividend payment $2.83 per share. While those days are long gone, the company’s turnaround is starting to gain a little momentum thanks to strong results at the U.S. and Canadian Mortgage Insurance divisions and a modest rebound in the Long-Term-Care unit. The improvement is focused on reducing cash expenses by $150 million annually, divesting underperforming assets and restructuring certain businesses.
Big name guru investors like Jim Simons (Trades, Portfolio), Richard Pzena (Trades, Portfolio) and Arnold Schneider (Trades, Portfolio) own sizable positions. It is worth more than the buyout price, but the ~50% annualized return provides a solid risk reward.
Tianjin Tianhai Investment Company is buying Ingram Micro for a cash value of $6 billion, $38.90 per share. This deal is expect to close in the next couple of weeks, and while it only offers 4% short-term yield, the annualized gain is north of 50%.
On Nov. 1, Ingram Micro and Tianjin Tianhai received clearance from the Committee on Foreign Investment in the United States to proceed with the acquisition. Upon completion, Ingram Micro will become a part of HNA Group, a Fortune Global 500 company that has gone from being a regional airline into a global powerhouse with tourism, logistics and financial service units. The margin of safety on this deal is extremely high and worth the short-term tax burden, especially if a minor amount of leverage is employed.
Lattice Semiconductor (LSCC, Financial)
Lattice Semiconductor is being acquired by Canyon Bridge Capital Partners, a U.S.-based private equity firm, for a cash value of $1.3 billion, $8.30 per share. The deal is expect to close early next year and offers an 18% profit yield, 54% annualized gain potential.
Paying $1.1 billion seems pretty aggressive for a company that is losing money. However, taking a closer look, you see a strong focus on Virtual Reality and potentially the IoT with its HetNet smart cells. With semiconductors being such a competitive field, I do not see this deal facing any major concerns.
Disclosure: I do not own any of the stocks mentioned in this article.
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