The arbitrage spread appears to be about 2.5% in the transaction but pros say they can enhance the return with dividends
Several large corporate acquisitions are set to close, so the takeover arbitrage community has been hoping for a big new transaction that would offer a way to put money to work. It got an enormous one Wednesday with Exxon Mobil’s agreement to buy Pioneer Natural Resources.
That means the value of the Exxon offer is about $247 a share, a roughly 2.5% premium to Pioneer’s stock price. That 2.5%, known as the arbitrage spread, looks small. Professional arbitrage investors, however, calculate a higher annualized return of around 10% because of dividends on Pioneer stock and other payments. Figuring out that return is complicated because Pioneer pays a variable dividend tied to profits. Someone putting on the arbitrage would buy Pioneer and sell short Exxon. The arbitrager would have to pay the dividends on the Exxon short position.
The best-case return on the Exxon/Pioneer deal, for either professional or retail investors, is below those that arbs have earned on Microsoft ‘s deal for Activision Blizzard and Broadcom ‘s deal for VMware , both of which are due to close this month. Arbs try to get a return of at least a few percentage points above risk-free Treasury bills to compensate for the risk.
Before Biden, one arbitrager told Barron’s, the deal likely wouldn’t have generated much scrutiny given the fragmentation of the U.S. energy business. But there is no great love for Exxon and Big Oil in the administration: Biden said last year that Exxon “made more money than God.”
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