Yeah, no deal is safe, but I don't think the risk justifies the spread.
First, people do care about earnings. They were a train wreck. I don't think you can deny that. But, I keep in mind the following as the spread widens day after day --
* Apollo is a strategic buyer who has been chasing them for at least two years, so at least there is will there.
* Apollo saw about 65-75% of the quarter during DD. So they and their bankers could have (and at least should have), known the Q would be bad, unless it all fell apart in June.
* The break fee on a financing failure is a relatively high 5% of EV, and CTB has easy access to it. So there is will there.
* Party C was willing to offer $38/shr, provided they had 3 months of DD. The forward break fee is about 2.2% of EV. Party C was a strategic party that was in the bidding late in the game, and appeared to drop out due to lack of time, not lack of will or financing. The bad earnings certainly cast doubt about the willingness of Party C to proceed at $38, but it is still out there.
Yes, the financing could fail, and no deal is safe, but it is about probabilities, not possibilities. I've always personally felt the spread on this deal was irrational, but I've been wrong before and could be wrong now. Good luck out there, and DYODD.
MT, good to see some of the old hands around- I'm spending a fair amount of time on Seeking Alpha- their M&A feed is a decent replacement for the garbage that yhoo has now, FYI.
I'm assuming you know about the strike in China? I see that as the bogeyman here. I bt, then sold, then started buying again last week. Perhaps I was too early. I'm guessing the strike b/c the drops are on the open so perhaps following the news cycle that is 12 hrs ahead?
For a third-world deal its a decent setup. Better than the typical Chinese deal and most of those have closed. Agree interests are aligned w wanting the deal to close.
Good analysis. As I indicated in my post, I think the deal ultimately gets done for many of the reasons you mentioned. I've been long the $30/$35 NOV 13 call spread since the deal was announced, and stand to make a lot of money if the deal closes. Therefore, I'm hoping Apollo is suitable motivated and bankers suitably positioned to place the deal's debt. However, when you are financing $2.5bb of debt, I don't think you can speak in terms of safe return or guarantees. If this falls more on no news, the risk/reward is very attractive, and I may add to my position.
Unfortunately, for Cooper longs, it is not guaranteed. Apollo needs to sell $2.5 billion in debt to finance the deal, most of which will be serviced by Cooper. Cooper's poor results call into question its ability to service the debt. At the end of the day, Apollo probably gets the financing done, but it is I would not characterize the 7% return between now and then as safe. This deal has more risk than your typical merger arbitrage deal, hence the spread.
Adding to the excellent points made so far, India's capital outflow controls are another wrinkle to the financing process. Some observers feel the M&A fund raising environment is now about as good as it gets. So anything that slows the timeline is a disadvantage.