Merger Arbitrage Question
Hi Monkeys
Quick question: why would a transaction between 2 public companies that is nearly certain to be completed still have a spread (Offer price-current price) that could be an arbitrage opportunity?
I am referring to a deal like the KKR//KFN acquisition.
-- Where KFN has no employees; it simply farms out management of its assets to KKR people.
-- KFN's board even seems like a bunch of people very friendly to KKR (SHOCKER), so I can't see the board as an obstacle.
There was an article that suggested a KFN shareholder questioned the due process by the board in evaluating the offer, but it was a 27% premium to where KFN was trading. Everyone on the deal announcement call was surprised that it was so high.
What am I missing? The spread is 3.5% annualized [as of 12/20]. That's pretty significant.
Thanks,
TS
Because although a deal is certain to be completed, you never know what complications can occur within the process that change the price of the deal. The fact that KKR and KFN are so cozy is already a red flag on the deal that shareholders can raise, conflicts of interest arise in these types of situations and must be dealt with properly through procedural, legal and financial measures. When a deal is signed, it is months before it is completed. Within that time a number of things can happen that lead to the price dropping, going up or the deal going south for now.
A 27% premium for the deal is not a very high premium, so perhaps some people thing shareholders will raise an issue with this price through shareholder litigation, which will end up souring the deal. Especially if the board "likes" KKR and already does business with them, the board and its lawyers better make sure they have their minutes reflecting a fair, unbiased process upfront, otherwise the Business Judgement Rule gets thrown out and they have to show an entirely fair process, which can be hard to do, hence the small spread.
KFN is a specialty finance company that was originally set up by KKR a number of years ago as a standalone BDC. As a publicly traded BDC it functions as a permanent capital vehicle via which KKR conducts its MM lending activities and assorted credit investments (high yield, CLOs etc.). With KFN, whenever KKR needs more capital for its credit business, it can simply offer shares to the public via the stock market instead of always having to raise and then close a series of funds. This practice of running BDCs on the side is very common among many leading PE firms.
The benefits of having such a permanent capital vehicle is less important now that KKR itself has become a publicly traded MLP. I guess KKR leadership just decided that it is not worth the regulatory burdens having to deal with filling and disclosure requirements for two publicly traded companies. So it makes sense to have KKR absorb its subsidiary.
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