Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Merger arbitrageurs, also known as folks with strong stomachs who bet on deal outcomes, may be feeling a little queasier after new Treasury rules on inversions threatened to scuttle Pfizer's $160 billion deal for Allergan. But they also have at least one reason to breathe a little easier: The prospects for the Staples-Office Depot deal that looked set to fail as recently as last month are at their brightest since last July.

Out of the Woods?
The spread on the Staples-Office Depot deal has fallen to its lowest point since July 2015.
Source: Bloomberg

Staples shares reached $11.34 early on Tuesday, their highest level since the FTC filed to block the deal in December. The bump came in response to a request by Staples that the lawsuit should be dismissed because the U.S. failed to meet its burden.

It's not unreasonable to think this request could be granted. Already, the judge handling the case has criticized the actions of the agency for attempting to elicit false information from an Amazon executive to bolster its case. Also, the judge has been "frustrated and bothered" by some of the FTC's expert witness's conclusions as well as his failure to conduct certain analyses -- in part due to the agency's influence, Bloomberg Intelligence analyst Jennifer Rie notes. 

A successful case dismissal or  a settlement with the FTC would provide even more relief for gutsy investors who held onto their Office Depot shares through the first quarter, despite -- as it was explained to me by one shareholder -- wanting to throw up for days and weeks. Unlike Starboard Value, which gave up much of its potential gains by paring its stake in the December quarter to below 5 million shares, the likes of Elliott Management -- which added 4.3 million Office Depot shares during that same quarter -- have profits in their sights. 

Starboard Out
Starboard's stake in Office Depot has shrunk dramatically.
Source: Bloomberg

Staples' offer hovers roughly 27 percent above Office Depot shares, which is well below the 87 percent premium available in mid-January when the deal looked most at risk. That spread will shrink further if Staples and Office Depot manage to score one over the FTC, and it will be the third teetering deal in recent weeks to land unexpected victory.

Acquisitions of utilities Cleco and Pepco, which at times looked doomed, eventually won approval by state commissions only after their acquirers bent over backwards by agreeing to more concessions than were originally fathomable. It's unclear whether the regulatory hardball in these two cases served as a negotiation tactic but if that was the intention, it worked.

Respite for merger arbitrageurs is never widespread and life for Baker Hughes shareholders is markedly less rosy. U.S. antitrust officials are preparing a lawsuit to stop Halliburton from acquiring it, in part because divestitures offered weren't sufficient, according to a Bloomberg report on Tuesday.

Escalating
The spread on the Baker Hughes-Halliburton mega-deal has risen to its highest level since its Nov 2014 announcement.
Source: Bloomberg

There's no way of knowing how that situation will play out, but Staples-Office Depot serves as a reminder that betting on unpredictable outcomes can as easily result in joy, as in pain.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net