Difficult times for arbitrage profit seekers

As you probably know, credit has really tightened and it is putting pressure on investors looking to make an arbitrage profit.

Let's revisit the BCE deal example. Let me first remind you that a deal has been signed to sell the company at C$ 42.75 in December 2008. However, the stock is now trading at C$ 33.00 on the Toronto Stock Exchange. The arbitrage profit looks very attractive, but with the credit crisis worsening, doubts about the financing of the transaction are getting bigger and bigger every day.

Still no news from Garda's review of strategic alternatives (and expected sale of its armoured car unit). Could tight credit conditions be the reason why a deal has yet to be signed?

Arbitrage profits aren't 100% "guaranteed" even if a deal is signed or highly expected. Merger and acquisition arbitrage is much "safer" when markets conditions are "normal" and there is a steady flow of M&A successfully completed.

Garda, Verenex and BCE follow-up

Allright, time for a little follow on previously mentionned stocks.

Let's start with Garda (GW.to). The stock is in an absolute freefall. Down more than 30% today on the Toronto Stock Exchange and closed at 1.58$. This is a stock that has a 52-week high of 20.82$. It seems that the stock is in the middle of a perfect storm: disappointing results, lots of debt, trying to sell a unit in the middle of a credit crisis... Things aren't looking too good and the market is really punishing it.

Verenex Energy (VRX.to) was also mentionned in an earlier post. After falling from 9$ to 7$, the stock had a 25% 1-week gain and has closed at 8.79$. Still no news about the strategic review (i.e. wanting to sell the company) but the operations are perceived has solid (by opposition to the disappointing Garda) so the stock hasn't been punished like GW.

Lastly, BCE closed at 37.20$ with a sale price of 42.75$ to be given in less than 3 months. It certainly still looks like an attractive opportunity from a pure arbitrage point of view but remember that the credit market is very tight and the biggest deal in Canadian history could potentially not get done because of lack of capital from the buyers.

As you can see, with the credit crisis, the merger and acquisition world is rough. Stock Investment Partner suggest that you be careful when trading on an arbitrage basis.

Arbitrage opportunity widens

As mentionned in a previous post, BCE shares present a big arbitrage profit opportunity. At the time of my first mention, the shares traded at $39.79 on the TSX with an offer price of $42.75 to be paid in December. Today, BCE shares closed at $39.13 after reaching a day's low of $38.27.

This drop is most probably linked to fears about the financing of the deal. Indeed, after Fannie and Freddie, now Lehman is worrying the markets. People are scared that the crisis is far from over and doubt more and more that BCE's buyers will be able to get the financing. After all, it is the largest takeover in Canadian history.

Stock Market Investment Partner will leave you the task of determining if the risk-reward relation of this arbitrage is right for your own financial situation.

Arbitrage profit opportunity

Let's take a look at a low risk way to make money on the stock market: arbitrage. An arbitrage opportunity exists when a close to riskless profit can be obtained by an investor. You may be wondering why this opportunity exists if there is no risk. As mentionned, there is "close" to no risk in most arbitrage trades. If you want riskless investments, don't use the stock market.

Let's look at a current situation. Canadian telecom powerhouse BCE (Bell Canada) is being acquired at a price of 42.75 C$. However, today on the TSX (Toronto Stock Exchange), it trades at 39.79 C$. By the way, BCE also trades on the NYSE. Regulatory approaval has been given and the buyers are confident about getting the financing. So why is it not trading nearer the offer price? One part of the answer is that as long as the 42.75 C$ isn't in your pocket the market considers that there is some risk. In other words, the market participants are protecting themselves in case something goes wrong. This protection is the lower trading price. The second part of the answer is time value of money. The deal is supposed to close in December, so money invested in BCE shares now can't be invested elsewhere. Investors need to be rewarded for that sacrifice. A lower stock price does that.

Let's do the math: In 3 months, you will get a 7.44% raw return on your investment. Not bad for a "low-risk" arbitrage (I stress that no stock is riskless). As always, you should do your own research and see if this is a good trade for your situation.

Arbitrage opportunities can be helpful stock market investments during difficult volatile markets.