What is a merger without a bit of arbitrage? Ask Royal Dutch Shell and BG Group.
Pentwater Capital Management this week became the first big merger arbitrage fund to disclose a position in BG, after Shell’s $70 billion cash-and-stock deal to buy the U.K. oil and gas company.
But with the deal not slated to close until early next year, and requiring approval from several regulators, other arbitrage funds will likely move slowly in putting on trades, especially with few obvious counter-bidders.
Indeed, the market implied probability of the deal closing is 75 to 80%, according to Olivetree Securities. That looks low for a strategic deal struck under the U.K.’s strict takeover rules.
One reason is the deal’s size: owning just 1% of BG would take about £410 million ($610 million). There just aren’t enough arb dollars to take sizable chunks of the company and squeeze the spread. Meanwhile, notes one arbitrage investor, there are plenty of other deals, like Time Warner Cable-Comcast and Halliburton-Baker Hughes, offering attractive spreads as well.
There is another potential worry, especially with AbbVie’s decision to ditch its deal with Shire fresh in investors’ minds. Shell has agreed to pay £750 million to BG in the event the larger company’s board changes its recommendation on the deal, not a big break fee for a transaction of this size.
That, argue some bearish types, amounts to an option for Shell to walk away if the oil price tumbles. Shell may be unlikely to give up on such a significant strategic move. But with uncertainty over oil, and many months until the deal closes, that looks enough to keep many arbitragers on the sidelines for now.
By Helen Thomas
