Remember the last time I told you kids to play a merger arbitrage? It was when Prem Watsa announced he was looking to take over BlackBerry at $9 (U.S.) per share. The stock traded at $8.02 at the time. And as we all know, the deal didn’t happen, sending shares reeling, all the way down to below $6 per share before finally recovering. It hit a high of $11.50 in July, before settling down into the $9.50-$10 range, where it sits today. Remember, these are all U.S. dollar prices.
So I got the BlackBerry call wrong, but anyone who bought at $8 would have ended up being okay if they just waited a few months. The deal fell apart in November, but shares moved above $10 in both January and March, which would have given you a 25% return in a few months. Or you could have held it, because apparently you are a glutton for punishment like I am.
Full disclosure: I own BlackBerry shares. It’s not a huge position.
Even though I swung and missed the first time around, I’m back to play the merger arbitrage game, but this time with Bell Aliant. Let’s take a look at how the Bell Aliant merger arbitrage scenario would shake out.
- On July 23rd, BCE made an offer of $31 per share for the 56% of Bell Aliant shares it didn’t already own.
- Bell Aliant accepted that deal quicker than stray Korean cats run away from me.
- BCE has applied for and gotten permission from the feds to make this deal happen
- Bell Aliant has announced that it’s not going to pay its usual Sept. 15th dividend for common shares.
- The deal will close on September 19th
On Friday, shares of Bell Aliant closed at $30.45 each. Let’s look at a 5-day chart to look at where the price range is.
I like how it cuts off at the bottom. My sloppy work will be the death of us all.
As you can see, shares have spent most of the time in the $30.50 range, temporarily dipping below $30.40 a couple of times on Wednesday and Friday. For the sake of the rest of the post, let’s assume you can pick up shares at $30.40.
Say you buy 400 shares, using the SUPER LOW COMMISSIONS OF QUESTRADE THE BEST BROKERAGE EVER. (Sign up for an account plz. Nelly would like to get paid)
That’ll set you back a cool $5, coming to exactly 1.25 cents per share.
Commissions per share: $0.0125
Total Cost: $30.4125
Percentage profit: 1.93%
Number of days: 32/365 = 8.76% of the year
Annualized return: 22.05%
If you bought 400 shares like I point out earlier, here’s what you’ll get paid.
Sale price: $12,400
A few things to note before you run out and do this:
1. You have to tender your shares by the 19th of September. Which means you’ll have to call Questrade and tell them that you want to sell. This will save you 5 bucks in selling commissions.
2. I think the deal goes through, but there’s a risk it doesn’t. If it doesn’t, I’m pretty sure you’ll get the dividend that Bell Aliant plans to miss in September, which would knock your cost basis down to below $30 per share.
3. If you can pay $30.35 per share, you’ll increase your profits by nearly 10%. These are the types of situations where a few cents matter.
One of the reasons why I’m comfortable talking about this is because if the deal falls apart, owning Bell Aliant at $30(ish) per share isn’t the end of the world. It’s a steady company that isn’t going to do much except pay out most of its earnings in dividends. Based on the current share price, the yield is 6.25%. Even if you hold it for a couple years and the stock price goes nowhere, at least you’re getting paid nicely to wait.
The other interesting way to play this is through Bell Aliant’s preferred shares. There’s three series, the A, C, and E ones. The C and the E series have already gone up to the point where they yield a little more than 4% and aren’t so exciting. But the series A is a little more interesting, since they still yield a cool 5.2%. I haven’t looked into it much, but on the surface it appears that investors who buy now are getting a 5.2% yield from BCE when they take over the company (and the preferred shares), a full 1% higher than BCE’s preferred shares yield.
There might be a catch to that, but I couldn’t find it in a few minutes of looking.
Anyway, if you’re nervous about the market and have some cash looking for a home, you could do a lot worse. A 2% return isn’t about to charm any ladies’ pants off, but it’s almost risk free and it takes damn near 2 years putting your money in the bank to earn the same thing. As a guy with cash on hand, I’m thinking about it.