Thursday, February 11, 2010

Deal uncertainty leaves arbitrage opportunity in Allegheny/FirstEnergy merger (AYE, FE)

Last night, First Energy (FE) and Allegheny Energy (AYE) announced they would "combine" in a stock-for stock transaction.  Sometimes "combining" means only ONE stock goes up...

The deal terms give Allegheny Shareholders .667 shares of FE for each share of AYE stock hold.  That made the offer work out to $27.64 before the market opened, and has dropped to $26.45 as of now due to the 4.3% drop in FE stock, upon which the offer is derived.

Allegheny shares are trading at 23.63 right now, leaving a 12% merger arbitrage opportunity by buying an equal dollar amount of AYE and shorting an equal dollar amount of FE stock.

This is a FAT, JUICY premium that merger arb's like the fella pictured above love to get involved with.  Not only that, but use borrowed money to enhance the return.  The only risk is that the deal collapses, of course.

In this case, doubts about the deal are why the remaining premium is so wide.  I for one can't fathom how companies would spend the I-banker money involved here without locking up regulatory approval beforehand, at least a "wink-wink" assurance....

FE stock is also under pressure due to worries that this deal will open them up to assault from the enviro-nuts, our Vice President among them.  That's because Allegheny's power portfolio is 95% coal-based.

This will be extremely interesting to watch unfold, especially because the clean nature of the all-stock deal invites about 1billion hedge funds to arbitrage the deal.

Copyright 2010 AlphaNinja

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