Merger Arb: Updates and New Ideas

I’ve been working the NGAS/MHR merger arb. The quick and dirty facts:

  • NGAS shareholders receive .0846 shares of MHR for each NGAS share.
  • 5% premium, deal value 98mm and closing date 3/31.
  • Thesis: NGAS is so small that no major players are in to price this trade. Later on I realize that margin requirements between NGAS being a penny stock and MHR being under 12.50, make the premium not quite as nice.

Lessons

  • NGAS is a penny stock, and MHR is below 12.50/share. Margin requirements are significantly more bitchy and I pay a .5% transaction fee to Scottrade. I now understand Scottrade’s margin requirements.
  • Trading (illiquid) penny stocks is hard.
  • So my actual premium was something like 5%-.5%/1.7 (for margin) = 2.65%. Still not bad for a month.

Bloomberg has ended their nice series of merger arb tables. I am now turning to this website http://www.sinletter.com/merger-arbitrage/ for data. I’m skeptical that their data is as accurate as Bloomberg’s (in terms of closing dates and premia).

ROME seems like another attractive opportunity for merger arb (too small size for hf), but the terms are quite unclear. Also, I don’t understand why AAI and DTG are trading at such a discount. It’s a visible deal with large size. I’m pretty sure close dates are wrong for both.

Finally, I’m going to get around to reading this article: http://www.analysisgroup.com/uploadedFiles/Publishing/Articles/Jetley_and_Ji_Shrinking_Merger_Arbitrage_Spread.pdf

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