Full disclosure upfront, I haven't put a lot of money into this idea (yet)...
CRU to be acquired by CPLP sometime around end-Sept, at an exchange rate of 1.56 CPLP units for 1 CRU share.
CPLP current price: $6.80 Implied CRU valuation: 10.61 CRU current price: $6.70 Arbitrage return: 58% in 1.5 months Annualized: 467%
So with the CRU share price basically un-tethered from CPLP, the market is clearly betting that the merger will fall apart. The concern on the msg boards seems to be that CPLP may have to cut their dividend since CRU isn't generating the same level of cash as CPLP, which will scuttle the deal for CPLP holders.
But, why should it? There's still a ton of benefit to CPLP from the deal. It's accretive to CPLP: at today's share prices, they're buying CRU at a Price/Book around 0.4, with CPLP units that are priced at a P/B around 1. The deal also delevers CPLP's balance sheet since CRU has a low debt/equity ratio. Also, CRU may not be generating the same level of cash as CPLP, but it is still DCF positive, and CPLP has already indicated they plan on moving CRU's boats from spot charter to "period" (time) charter which should improve revenues.
Management also is still behind this deal, having committed all the shares they control to vote for it. Plus just this morning they reprinted an article from some analyst praising the deal and asserting CPLP can maintain their divy post-merger.
So this is not a no-brainer, but it seems like the odds of this merger happening are much better than the market is attributing to it thru the respective share prices. Thoughts?
I have been following this arb since they announced the deal. The arb has been quite significant at times. I have never actually bought CRU, however, I just kept an eye on it and used it to confirm my CPLP shorts which I have done from time to time.
I think there is an EXTREMELY high chance that the merger goes through since the general partner is basically calling the shots for both companies.
As far as the sustainability of the dividend, there was an absolutely ridiculous analyst report out discussing such and concluding that it was safe. CPLP's interest-only credit facility begins amortization in the summer of 2012 in an amount in excess of their current dividend. Combine that with the additional shares from the merger, and I can't imagine how they would continue the dividend. That, however, is not all that relevant to the arb which I assume means you would short one and buy the other?