Merger Arb Spreads Remain (TXU, TRB,SLM, CEN)

There are over 150 pending mergers out there that have not yet closed.  After last week’s Fed actions, there are still some deals out there that are perceived to be at risk as far as the deals closing or if the deals can close at the announced buyout price. Some of these spreads have tightened in merger-arb scenarios, but there are quite wide spreads on many pending deals.   We’ll be sending out a few selected deals we expect to go through without issue before Labor Day to our Special Situation Investing Newsletter subscribers.  Earlier we covered ACS, URI, FDC & CCU merger-arb spreads.

The buyout of student loan giant SLM Corp, or Sallie Mae (NYSE:SLM), is alsostill at risk. Sallie Mae holders have already approved the $25 Billiondeal for $60.00/share last week, but the buyout by J.C. Flowers still faces regulatory and credit market risks.With shares trading down again and under $48.00 today, this wouldrepresent a 25% gain for merger-arbs now if the deal is able to close.Shares traded close to $60.00 on their own back in early 2006.

The $5.3 Billion buyout of Ceridian (NYSE:CEN) by Thomas H. LeePartners has a wide enough merger-arb spread to make you scratch yourhead. The $36.00/share buyout for Ceridian is now seeing shares tradeunder $33.00, giving roughly an 8% merger-arb spread.

Sam Zell’s $8.2 Billion buyout of Tribune Co. (NYSE:TRB) is still ahighly leveraged deal that in fact is only a quasi-buyout and one thatmany are not giving the highest marks.  Shareholders are set to votetomorrow.  With shares at $26.50, they are at least higher and closerto that $34.00 buyout price.  The prevailing thought here seems to be that this buyout price may be lowered.

There also remains speculation that the near-$45 Billion (afterdebt) acquisition led by KKR& TPG of TXU (NYSE: TXU) may still not becompletely done.  TXU is an interesting one, because the company hastelegraphed that it will split into three units if this merger fails.Shareholders vote September 7 for the $69.25 buyout price, and some keyshareholders have already signaled they are against the merger.  Withshares at $64.00, that is a 7.5% discount.  The good news here is thatbefore the Fed intervened with a discount rate cut, shares got as lowas about $61.00 last Thursday. Here was a large list of competitors that were thought at the time it was announced that could also be under review.

Maybe Warren Buffett will finally get off his wallet and do that whale of a deal he said he’d love to do.

Jon C. Ogg
August 20, 2007

Jon Ogg can be reached at [email protected]; he is editor of the 24/7 Wall St. Special Situation Investing Newsletter and he does not own securities in the companies he covers.