Is the Integrys–Wisconsin Energy merger a “do” for investors?

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Is the Integrys–Wisconsin Energy merger a "do" for investors? (Part 10 of 10)

(Continued from Part 9)

The annualized return is pretty paltry

Arbs generally avoid utility deals—and for good reason. Typically, the companies have an aggressive expected timeline and these deals don’t close on time.

In the Integrys–Wisconsin Energy transaction, you’re getting about a 2% annualized yield. That assumes the timing guidance is correct. But chances are, it isn’t. Given a 21:1 risk-to-reward ratio, it simply isn’t worth your time. The only reason to get involved in this spread is if you think another buyer could come in for Integrys.

As I said in a previous piece in this series, utility deals are generally not conducive to this type of behavior. Why? Because state public utility commissions generally look down at high merger premiums and worry about the debt load on the surviving company. Keeping their regulated utilities out of financial trouble is in their DNA.

Should you short the spread?

Okay. If the spread isn’t a set-up, then what about going the other way—shorting Integrys (TEG) and buying Wisconsin Energy (WEC)?

While it often makes sense to reverse some merger spreads as a general portfolio hedge, utility deals aren’t really suited to this strategy. Why? Utility deals usually do close. It’s only a matter of dividing up the synergies with the regulators. Some arbs will reverse these deals in anticipation of a “scare,” which is a temporary widening of the spread on some negative news—typically a regulator commenting to the press that the deal’s in trouble.

Experienced arbs will take this as the standard choreography of utility transactions. The newbies might panic out of their positions or unwind some. The experienced arbs may use the scare to exit their position or even set some up.

Other must-know merger arbitrage resources

You can find Market Realist’s helpful primer on merger arbitrage analysis   here.

Other important merger spreads you should consider include the Covidien (COV) and Medtronic (MDT) deal as well as the DIRECTV (DTV) and AT&T (T) deal. Check out  our analysis of the Covidien-Medtronic deal .

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