Street Capitalist: Event Driven Value Investments

A couple of days ago, Reuters ran a story with current arbitrage situations and their spreads. With the credit situation still poor, a number of spreads have widened considerably, adding to deal risk and ensuring sizeable spreads.

Because my mother isn’t here tonight, I’ll even confess to you that I have been an arbitrageur
-Warren Buffett

Here’s a few merger arb deals I’m seeing right now:

Target: Clear Channel Communications
Buyer: Bain Capital, Thomas H. Lee Partners
Arbitrage Spread: 13.6%
My take: CCU’s buyout was approved by shareholders on October 1st, if the buyout is successful shareholders will receive $39.20 per share, representing a 13.6% premium over today’s price. With the deal expected to close December 1st, this represents an annualized return of 331%

Some investors may be spooked at the fact that Providence Equity is thinking about walking away from a deal to purchase 56 television stations owned by CCU. This should not be an issue though, as the company said in a recent filing that the sale of the TV assets is not a condition of closing the buyout, which was approved by shareholders in September and is awaiting regulatory approval.

Clear Channel’s 3Q numbers were positive and this certainly looks like an attractive situation for investors at the moment.

Target: PHH Corporation
Buyer: The Blackstone Group
Arbitrage Spread: 45.9%
My take: The spread is huge on this, because of the immense deal risk. The Blackstone group is currently having issues with securing financing to buy PHH, an outsource provider of mortgage and fleet management services. All mergers involved with sub-prime mortgages are extremely dicey.

The company’s 3Q numbers came out and they were extremely poor. I’d sidestep this all together, there’s no sense in you trying to be a hero and making a huge return in the face of the huge risk that the deal may fall through.

Target: SLM Corporation
Buyer: J.C. Flowers – Led Group
Arbitrage spread: 53.65%
My Take: The spread is huge here for two reasons. One, J.C. Flowers wants to lower the price his group is bidding for the company since he feels that current congressional legislation will have an adverse effect on SLM’s business. SLM is arguing that J.C. Flowers knew of these risks when it made their bid for the company.

Secondly, because of this dispute, SLM is taking Flowers to court. SLM seems to have a pretty strong case, but I don’t think the situation is worth your investment at the moment, since the case will not be brought to court till sometime in June. It may be worth studying for the time being though.

Target: Tribune Company
Buyer: Samuel Zell
Arbitrage Spread: 13.3%
My Take: Here, you’ve got a 13.3% spread with an annualized return of 107.54%. Sam Zell seems very committed to seeing this deal through, but there’s an issue with the FCC regarding media control in the same markets. Zell may have to sell some of TRB’s properties in order to make the deal go through. This doesn’t seem to be a problem because as Zell says:

“I’ve had offers on every single asset in the portfolio. Chuck Schumer”-the New York senator-”calls me, because he’s hustling for some people who want to buy Newsday. Baltimore people are calling, Allentown’s calling, Florida’s calling, and, in L.A., David Geffen and Eli Broad. So all I can tell you is that for a dead industry with no future there are an awful lot of schmucks who want to take it away from me!”

Out of these four situations, I feel like TRB and CCU offer the best ideas. CCU is held by some notable investors: Eddie Lampert and Daniel Loeb. TRB is held by: Charles Brandes and Brian Rogers.