Arbs See L-1 Takeover Return Evaporate on Safran Query: Real M&A
Arbs See L-1 Takeover Return Evaporate on Safran Query
Jean-Claude Coutausse/Bloomberg
Safran SA headquarters in Paris.
Safran SA headquarters in Paris. Photographer: Jean-Claude Coutausse/Bloomberg
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Merger arbitragers who bet France’s Safran SA (SAF) would succeed in a takeover of L-1 Identity Solutions Inc. (ID) are facing possible losses of as much as 39 percent as a U.S. national security panel holds up the deal.
L-1, the Stamford, Connecticut-based maker of fingerprint scanners, American passports and driver’s licenses, has slid 8.1 percent in two weeks after approval for Safran’s $1.58 billion acquisition was delayed for a second time by a U.S. review of cross-border deals affecting national security. L-1 closed 10 percent below the $12-a-share cash offer at the end of last week, the widest gap since it was announced in September. If the takeover is completed in June, traders would reap an annualized return of as much as 207 percent, the most of any pending all- cash U.S. deal, according to data compiled by Bloomberg.
Arbitragers may lose at least 33 percent more on their investment if the transaction falls apart and would end up owning an unprofitable company that already sold its counter- terrorism business to help close the deal. Meanwhile, short sellers have pushed bearish bets against L-1 to an all-time high and stand to reap gains if the acquisition is blocked.
Traders “could get blindsided,” said Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth Capital LLC. “You can imagine the level of discomfort in Washington ceding control of that business to a foreign company. The downside is obviously big because they’ve already sold off some of their business.”
Deal Premium
Catherine Malek, a spokeswoman for Safran, didn’t respond to an e-mail sent outside normal business hours.
“The negotiations are progressing,” Robert V. LaPenta, chief executive officer of L-1, said in an e-mailed statement. “And while there can be no assurance that an agreement will be reached, we believe the transaction will be completed in approximately 30 days.”
Safran, a Paris-based maker of airplane engines for Airbus SAS and Boeing Co., agreed to buy L-1 for $12 a share, or 48 percent more than L-1’s 20-day trading average before it was first reported July 15 that Safran was considering a purchase of L-1. The offer is valued at $1.58 billion including net debt.
Since closing at $11.73 on April 29, L-1 had slumped $1.22 below Safran’s offer as of May 13, according to data compiled by Bloomberg. The difference is now the widest since Safran agreed to buy L-1 on Sept. 20. Prior to April 29, shares of L-1 had never fallen more than 51 cents below the bid.
‘Selling Off’
“The confidence level seems to have gone down,” John Maysles, an event-driven analyst at Elevation LLC, said in an interview from Los Angeles. “It has been selling off ever since that second extension.”
L-1 fell 4.3 percent to $10.32 today in New York, the biggest decline since July 16. Safran dropped 0.3 percent to 27.50 euros in Paris.
L-1 makes everything from fingerprint- and eye-scanning products to face-recognition technology and passport- verification software. It’s also the largest producer of U.S. driver’s licenses, according to the company’s website. The deal was contingent on L-1’s sale of its counter-terrorism business to London-based BAE Systems Plc (BA/), Europe’s largest defense company, for about $297 million. That transaction was completed in February.
Safran agreed to pay 37 times L-1’s earnings before interest, taxes, depreciation and amortization in the 12 months through June. The median multiple paid for identification- systems companies in the last 10 years is 17 times Ebitda, according to data compiled by Bloomberg.
‘In the Dark’
The deal was originally expected to close in the first quarter of 2011, the companies said when it was announced. Safran and L-1 voluntarily notified the Committee on Foreign Investment in the U.S., which reviews foreign acquisitions of national defense and security businesses, last year to be sure the U.S. President wouldn’t block the transaction or require divestitures, L-1 said in a regulatory filing. Safran, which is 30 percent owned by the French government, and L-1 have since resubmitted their request twice to gain more time for approval.
Sandra Salstrom, a spokeswoman for the U.S. Treasury Department, said it doesn’t comment on specific CFIUS cases.
“With CFIUS you’re really in the dark and people are going off of what they feel is the confidence level after speaking to the company,” Elevation’s Maysles said. “There haven’t been any details on what exactly is holding this up, so we’ve been left in the dark here.”
‘Meaningful Progress’
The companies refiled at the end of April, and L-1 said “the parties have made meaningful progress” and expect the deal to close 30 days to 40 days after May 4. That means traders who purchased L-1 shares last week stand to reap a profit of 11 percent if the acquisition closes on June 2, for a return of 207 percent on an annualized basis.
“There’s a big gross number to make because the bid is $12, so there’s over a dollar to make now on an $11 stock,” Maysles said.
L-1 options traders are making the most bearish bets since October. Open interest for puts to sell the stock more than doubled in a week to 30,944 contracts as of May 13, or more than six times the number of calls to buy.
Put volume spiked to 11,256 on May 11, the highest level since August, according to data compiled by Bloomberg, after the deal’s approval was delayed a second time and L-1 reported earnings that missed estimates.
‘Substantial Downside’
The options are “definitely reflecting substantial downside risk,” said Ophir Gottlieb, head of client services at Livevol Inc., a San Francisco-based provider of options market analytics. “In other words, the risk that the deal doesn’t go through and that the company stock returns back to the pre-deal price.”
L-1 shares closed at $7.25 on July 14, the day before Safran’s interest was reported. That’s 33 percent lower than the share price on May 13 and 39 percent less than the stock’s peak of $11.95 since the deal was announced.
Short interest in L-1’s stock has almost quadrupled since Jan. 7 to a record of 17.3 million shares on May 9, according to London-based research firm Data Explorers. That represented almost 24 percent of shares available for trading. A short sale is the practice of selling borrowed shares on the bet prices will decline and the seller will profit from the difference.
L-1 reported May 10 that first-quarter revenue rose to $97.2 million, short of the $114 million estimate from Paul Coster, a New York-based analyst at JPMorgan Chase & Co. who rates the shares “neutral.”
‘Worst Case’
CFIUS investigations are difficult to predict, and L-1 may trade even lower than $7 a share if the acquisition is terminated, said Keith Moore, an event-driven strategist at MKM Partners LP in Stamford, Connecticut.
“They already sold off that one operation that was profitable to BAE, and now the remaining operation is not doing as well as people thought it should be doing,” Moore said. “That’s usually the worst case for an arbitrager. If a deal breaks that’s one thing, but if you now have a fundamentally unsure outlook for the security, you can’t just go back.”
Overall, there have been 9,104 deals announced globally this year, totaling $895.4 billion, a 21 percent increase from the $739.3 billion in the same period in 2010, according to data compiled by Bloomberg.
To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Justin Doom in New York at jdoom1@bloomberg.net.
To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.
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