Assessing the Life Time Fitness Merger (Part 11 of 11)
The Life Time Fitness merger and the MAC clause
The MAC (material adverse change) clause is one of the first things arbitrageurs look at. In the Life Time Fitness merger, the MAC clause lays out the circumstances under which the private equity consortium can back out of the deal with Life Time Fitness (LTM).
Let’s take a look at the specific conditions that could stop this deal. In private equity transactions, arbitrageurs take a very close look at the MAC.
The MAC clause, paraphrased
Please note that the following MAC clause has been paraphrased here to limit the legalese. You should still read and understand the actual language in the merger agreement.
“Company Material Adverse Effect” means any fact, circumstance, occurrence, effect, change, event, or development that, individually or in the aggregate, is or would reasonably be expected to be materially adverse to the business, assets, financial condition, or results of operations of the company and its subsidiaries, except for certain carve-outs:
- changes required by GAAP (generally accepted accounting principles) or other accounting standards (self-explanatory)
- changes in any laws or other binding directives issued by any governmental entity (self-explanatory)
- changes that are generally applicable to the industries in which the company and its subsidiaries operate (again, self-explanatory, although be careful of the disproportionate effect clause)
- any failure by the company to meet any internal or published projections, forecasts, or revenue or earnings predictions provided that the underlying causes of any such failure or decline may be considered (missing your quarter isn’t a MAC, but the reason why is)
- the negotiation, execution, or delivery of this agreement (hard to see that happening here)
- the termination of employment of or by any of the company’s executive officers or other employees after the public announcement of this agreement (if the CFO resigns due to the deal, it isn’t a MAC)
- the occurrence of natural disasters (note the disproportionate effect clause)
Merger arbitrage resources
Other important merger spreads include the deal between Salix Pharmaceuticals (SLXP) and Valeant Pharmaceuticals (VRX) or the merger between Pharmacyclics (PCYC) and AbbVie (ABBV). For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.
Investors who are interested in trading in the consumer discretionary sector should look at the Consumer Discretionary Select Sector SPDR Fund (XLY) or the iShares Global Consumer Discretionary ETF (RXI).
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