No takeover in America is giving arbitragers the opportunity to make more money in less time than CoStar Group Inc.’s deal for LoopNet Inc.
LoopNet, which runs a website that allows brokers to post and search commercial real-estate listings, fell more than $1.50 below CoStar’s per-share offer this week for the first time since the agreement was announced in April. With the deal set to close by year-end pending regulatory approval, traders betting the sale will be completed on time stand to reap an annualized 206 percent gain, according to data compiled by Bloomberg.
While some investors have grown concerned the LoopNet acquisition will unravel because of the Federal Trade Commission’s antitrust review, William Blair & Co. says the deal will most likely still win approval. Since neither CoStar, which sells software that lets real-estate developers and banks analyze property sales, nor LoopNet offer services to consumers and few of their products overlap, the transaction can overcome the regulatory scrutiny that caused AT&T Inc. to scrap its $39 billion bid for T-Mobile USA, according to MKM Partners.
“It’s a huge spread,” Keith Moore, an event-driven strategist at Stamford, Connecticut-based MKM Partners, said in a telephone interview. “Either the government’s going to challenge or the deal will be completed, and we tend to think that it’ll go through.”
Moore says that even if the FTC extends the review, he expects the transaction will close by mid-January. Based on that completion date, traders can still double their profit on an annualized basis at LoopNet’s price yesterday.
Today, LoopNet rose 1 percent to $18.09 a share as of 10:45 a.m. in New York, while the 82-stock Bloomberg U.S. Internet Index declined 1.5 percent.
“We’re working through the process and hopeful to complete the process,” said Richard Simonelli, spokesman for Washington-based CoStar. “We’re hopeful that it will go through.”
He declined to comment on its discussions with the FTC.
Cary Brazeman, a spokesman for San Francisco-based LoopNet, declined to comment on the pending transaction. Peter Kaplan, a spokesman at the Washington-based FTC, didn’t immediately respond to telephone calls seeking comment.
In April, CoStar agreed to buy LoopNet for $16.50 a share in cash and 0.03702 CoStar share, according to a statement. As of yesterday, the deal valued LoopNet at $19.03 a share.
While the transaction was approved by the boards of both companies, as well as LoopNet shareholders, the gap between the deal offer and LoopNet’s stock began to widen in December and reached $1.59 this week.
Richest American Windfall
With LoopNet closing at $17.92 a share yesterday, arbitragers who purchased shares at that price would triple their money on an annualized basis if the deal closes by the end of the year, data compiled by Bloomberg show.
Only two other U.S. acquisitions valued at $250 million or more are offering annualized gains of greater than 100 percent: Gilead Sciences Inc.’s purchase of Pharmasset Inc. and Carl Icahn’s hostile takeover of Commercial Metals Co.
Icahn’s tender offer expires on Jan. 10, while the Pharmasset takeover is scheduled to be completed two days later, data compiled by Bloomberg show.
If CoStar buys LoopNet by mid-January, the arbitrage would still hand traders an annualized 98 percent gain. The median annualized windfall is less than 5 percent.
One reason that the FTC is unlikely to block the LoopNet takeover is because it and CoStar have few overlapping customers, said Judey Delgado, a Cresskill, New Jersey-based senior analyst at Alpine Associates Advisors, which owns 5.3 percent of LoopNet.
Barrier to Entry
About 10 percent of CoStar’s revenue comes from the same subscribers as LoopNet’s, Andrew Florance, chief executive officer at CoStar, said in a conference call on April 27.
“It looks like it really is an opportunity,” Delgado said in a telephone interview. “It does really seem that this will get done, it’s our opinion that this will clear. There’s not a sense really that Washington is gearing up for a fight.”
The two companies would have as much as 25 percent of the market for data and analysis on commercial real estate, CoStar said. That means their potential competitors would still control at least three-quarters of an industry that relies on compiling publicly available information for property prices and sales.
“The uncertainty with the FTC has got people spooked,” Sachin Shah, a Jersey City, New Jersey-based merger arbitrage strategist for Tullett Prebon Plc, said in a telephone interview. That concern has been “misplaced and I believe a little bit exaggerated. Anybody in the real estate market could theoretically do what CoStar and LoopNet does. The market share is not substantial -- it’s still fragmented,” he said.
“The best-case scenario is you wake up before Christmas and the FTC says we’re done,” he said.
CoStar has a commitment from JPMorgan Chase & Co. for a $415 million term loan and a revolving credit facility of at least $37.5 million, CoStar said in April.
CoStar also sold shares in May, raising $225 million and boosting its cash and equivalents to $554 million, data compiled by Bloomberg show. That’s eliminated almost all the risk that the takeover will unravel because of a lack of financing, said Brandon Dobell, an analyst at William Blair in Chicago.
Steve Gerbel, a merger-arbitrage hedge fund manager at Chicago Capital Management, which sold out of LoopNet in June, says if the FTC decides the acquisition will lessen competition and challenges it, there is little chance a compromise could be reached that still allows the deal to be completed.
That makes it too risky a deal to bet on now, he said.
“It’s a very difficult transaction to fix,” Gerbel said in a telephone interview. “It’s an ‘all-or-nothing,’ and that’s what scared me and why we got out of the transaction.”
The demise this week of Dallas-based AT&T’s deal to buy T-Mobile USA, announced nine months ago, may also signal that U.S. regulators are taking a tougher stance on acquisitions.
CoStar and LoopNet won’t rise to a similar level of antitrust concern, William Blair’s Dobell said. Instead, regulators have taken more time to scrutinize the deal because they are probably less familiar with the industry, he said.
“In most other scenarios, whether it’s drug companies or AT&T and T-Mobile, you can see how there would be concerns about overlap or an undue pricing-pressure opportunity that would generally concern the FTC,” Dobell said. With LoopNet, “we’re still quite confident the deal closes,” he said.