Corner of Berkshire & Fairfax Message Board

General Category => General Discussion => Topic started by: longlake95 on October 26, 2017, 07:43:54 AM

Title: Aecon Arb oppprtunity
Post by: longlake95 on October 26, 2017, 07:43:54 AM
Aecon ARE.TO to be bought out at $20.37 in cash to close Q12018.
http://www.reuters.com/article/us-aecon-group-m-a-ccci/chinese-construction-group-to-buy-canadas-aecon-idUSKBN1CV1DS

Good place to park cash for a 4% return or 9% annualized.

Title: Re: Aecon Arb oppprtunity
Post by: rb on October 26, 2017, 08:26:32 AM
You're not worried of a regulatory block of the purchase by chinese of a company that's rebuilding nuclear power plants?
Title: Re: Aecon Arb oppprtunity
Post by: Cardboard on October 26, 2017, 08:34:40 AM
Yes and Chinese companies are notorious for not making good on their offers: delays, issues accessing cash, straight deal cancellation.

Cardboard
Title: Re: Aecon Arb oppprtunity
Post by: longlake95 on October 26, 2017, 08:44:17 AM
Oh yes - lots of Chinese deals gone south! However, CCCI are the real deal. The have a track record of buying North American construction companies - like Fried & Goldman in Texas. Which by all accounts has been a success. I still need to dig some more, and in the meantime, the excitement may subside and provide a greater spread.
Title: Re: Aecon Arb oppprtunity
Post by: rukawa on October 29, 2017, 01:20:24 PM
Quote
Good place to park cash for a 4% return or 9% annualized.

4% is way too small a spread unless you are a merger arb hedge fund.
Title: Re: Aecon Arb oppprtunity
Post by: writser on October 29, 2017, 03:33:36 PM
4% is way too small a spread unless you are a merger arb hedge fund.

In general I disagree. Plenty of deals I'd love to buy at 4%. However, in this case a Chinese state-owned company is trying to buy the largest public Canadian infrastructure company, one that knows how to build and maintain nuclear reactors. Regulators will take a hard look. Tough to handicap.
Title: Re: Aecon Arb oppprtunity
Post by: rukawa on October 29, 2017, 08:06:23 PM
4% is way too small a spread unless you are a merger arb hedge fund.

In general I disagree. Plenty of deals I'd love to buy at 4%. However, in this case a Chinese state-owned company is trying to buy the largest public Canadian infrastructure company, one that knows how to build and maintain nuclear reactors. Regulators will take a hard look. Tough to handicap.

I'm curious as to how you would size such deals?
Title: Re: Aecon Arb oppprtunity
Post by: writser on October 30, 2017, 09:38:15 AM
Usually I am invested in several deals at once, each with a 2%-5% allocation. I personally like to diversify. There is no silver bullet as far as I know.. I guess it depends on how you perceive upside, downside, deal risk and estimated time to completion. For example, a few weeks ago Unilever announced (https://www.unilever.com/news/Press-releases/2017/unilever-to-buy-back-preference-shares.html) they were retiring their preference shares. Deal was brokered with the largest holder, deal size was very small for Unilever, they expected to complete the deal by year-end and I didn't see any regulatory problems. There was some selling pressure as shares surged ~200% because of the announcement. Preference shares were very illiquid but I managed to build an ~8% position at a ~4% spread. Excellent risk-adjusted IRR as far as I am concerned and I wouldn't have minded to own a bit more.

Sometimes microcap deals trade at largish (~4% - ~8%) spreads shortly before completion because of a combination of illiquidity, a lack of information, deal complexity and/or a significant rise following the announcement and because these deals are too small for almost everybody expect for PA's. Questar (https://www.valueinvestingblog.net/questar-special-situation/) was an example of such a deal earlier this year and at some point a ~13% position for me. In 2016 Kahala (https://alphavulture.com/2016/06/06/kahala-brands-the-merger-arbitrage-idea-of-the-year/) and Glacier Water (https://alphavulture.com/2016/10/28/forget-kahala-glacier-water-is-the-merger-arb-of-the-year/) were similar deals in which I held even larger positions. In 2015 Safeway (http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/safeway-6471/msg209059/#msg209059) was, due to deal structure, imho a no-brainer large-cap deal in which I invested 25% of my funds because I didn't have the balls to go bigger.

In general, I like illiquidity, a lack of information and/or some uncertainty about the payout because these are risks I am willing to bear and other investors often can't or won't. I don't like regulatory risks as the only way I have to handicap these is a 'common sense' approach. I.e. in this case I think authorities aren't gonna give up easily a company building nuclear reactors, airports and the Vancouver Sky Train to a Chinese bidder. But other investors might be much better 'in the know' about what regulators think so I am not sure whether this is mispriced or not.

However, if the spread is large enough I sometimes give it a try. CAB (http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/cab-cabela's-incorporated/) was an example earlier this year where I didn't see why regulators would block the deal. Still I only bought a very small position (<2%). I currently own a few shares of BRCD, similar situation.
Title: Re: Aecon Arb oppprtunity
Post by: writser on February 13, 2018, 08:08:42 AM
http://www.aecon.com/Media_Room/~1417-Aecon-Announces-Extension-of-the-Arrangement-Agreement-Outside-Date

Quote
The parties extended the Outside Date following receipt of a notice from the Minister of Innovation, Science and Economic Development indicating that the federal Cabinet has, under section 25.3 of the Investment Canada Act, ordered a continuation of the national security review of the proposed acquisition of Aecon by CCCI.

Stock collapsed the past few days. Aecon traded around $14 - $16 before a strategic review was announced and around $16 / $17 after that but before the CCCI proposal. Assuming the stock will drop to a price in that region the market is now pricing in a ~30% chance of deal failure (very basic math, ignoring time value etc.). Seems quite high, especially given that they seem to have all other regulatory ok's required. Just my 5 minute assessment though.

Stock might be a decent gamble at current prices but still, hard to handicap.