Article by Vintage Value Investing

A quick recap of the facts

What seemed at first a fairly easy deal from a regulatory standpoint (antitrustwise at least) became more difficult when it transpired that a party of the transaction, Capital One, would not obtain timely approval to acquire The World’s Foremost Bank (Cabela’s credit card operation).

Cabela's
By TheZachMorrisExperience (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Cabela’s

This was important because acquiring deposits requires a license and all sort of complicated regulatory compliance, which Bass Pro did not want to take on. Hence, the presence of Capital One in the deal.

The reason why timely approval was necessary is because the end date (the date at which parties could terminate the agreement) was October 3rd. So when it became obvious that Capital One could not do this (regulators can’t seem to trust Capital One’s anti money laundering practices), the deal participants had to scramble for a solution.

Synovus steps in

A little known US financial institution, Synovus will take on the deposits that are putting regulators off in the deal with Capital One. Capital One will still be purchasing the credit cards portfolio. However, Synovus’ help is not entirely free and the company is getting no less than $75m for its contribution (it’s acquiring the bank’s assets at a discount and reselling the cards portfolio at a US$5m premium to Capital One). Those US$75m, and more, are directly deducted from Cabela’s shareholders pockets, chopping the offer by US$4, from US$65.50/share to US$61,50/share. While no reason were given for the price reduction, it’s clear to me that with the end date approaching and the possibility that Bass Pro terminates, Cabela’s was in a weaker position and had to cave in.

The merger arbitrage play

I’m obviously not thrilled by the prospect of losing the arbitrage premium on this. Based on my purchase price, I’ll just break even. However, this deal is coming back from a long way so I’ll take the settlement. Mind you, it’s not over as it still has to be approved by antitrust regulators and it’s now a party of four, which makes it even more complex.

With some luck (or lack of bad luck), we’ll be able to put this one behind by end of the summer. Fellow arbitrageurs, even those who will end up with a loss, should not be discouraged. It’s all about the overall picture, and not every deal will be a smooth ride. Besides, it’s always possible to make some money back by increasing its position in the transaction once the dust settles (all approvals are obtained and the closing becomes a question of time only).

Other portfolio updates

  • Increased position in SWC as CFIUS approval obtained and shareholder votes near (should not be an issue)
  • Increased position in SYUT, also with shareholder vote at the end of the month
  • Initiated position in Syngenta at US$89/share, which is the target of a tender by ChemChina. The deal has been dragging on forever with regulatory approval but it’s now very close to the finish line (all approvals obtained besides India). Target closing end of May/early June at US$94/share including special dividend at closing.