Many investors, including famed billionaire Warren Buffett in his younger days, regularly look to profit from an investment strategy known as ‘takeover arbitrage.’
As the name suggests, the premise for an investment is the announcement of a takeover offer. Unlike certain forms of arbitrage that can be described as ‘risk-free’, in most circumstances, takeover arbitrage does involve the risk of a takeover deal not being completed or the deal not being completed at the price the investor is expecting.
Here are four opportunities currently available to investors interested in pursuing takeover arbitrage.
1. Miclyn Express (ASX: MIO), which provides services to the offshore oil and gas industry, currently has an offer from its major shareholder for the remainder of its shares at $2.20. With its share price currently trading at $2.07, this would provide investors with a return of 6.3% from this point.
2. Trust Company (ASX: TRU) has now received offers from three suitors. For investors who moved early, this is perhaps the ideal takeover arbitrage opportunity because since the first approach for the company, new bidders have entered the race with progressively higher offers. With Trust’s share price at $7.44 and the most recent bid potentially a “knock-out, winning bid” it could be too late for investors to capitalise now.
3. Bega Cheese (ASX: BGA) lobbed a bid for Warrnambool Cheese & Butter Factory (ASX: WCB) in mid-September, after holding a strategic stake for some time. The current implied value of Bega’s offer is $6.21 compared with Warrnambool’s current share price of $6.10. Investors have a lot to evaluate here: the likelihood of a higher offer, the potential that a deal will ultimately get done, and monitoring Bega’s share price as there is a script component to the offer.
4. Graincorp (ASX: GNC) is in many ways the type of takeover arbitrage situation investors dread. The process has become extremely drawn out with multiple regulatory approvals and government approval required. With the shares trading at $12.26 there is still upside for investors and the time frame to completion should be getting close.
One of the benefits of undertaking arbitrage investments is (generally) the short time frame that an investor’s money is ‘tied-up’ for. For example if an opportunity is expected to provide a 5% return and assuming an investment time frame of four months, this equates to a 15% annualised return.
Arbitrage opportunities offer handy extra income for investors but they are not as dependable as income received from dividend-paying stocks. Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.