AMR-US Airways Block Sends Ripples Through M&A MarketChelsey Dulaney and Beth Williams
The U.S. Justice Department’s move to block the merger between AMR Corp. and US Airways Group Inc. is sending a chill through the deals market.
Since both airline companies were sued Aug. 13 to prevent the transaction that would create the world’s largest carrier, traders grew more skittish around other U.S. deals seeking regulatory approval. OfficeMax Inc. shares traded the furthest below Office Depot Inc.’s offer in more than two months, and the spread between Arbitron Inc.’s stock price and Nielsen Holdings NV’s cash bid hit a record, according to data compiled by Bloomberg.
“I would say that 90 percent of the Street was totally shocked that the DOJ decided to sue to block,” Kathleen Renck, New York-based head of event-driven research at FBN Securities Inc., said in a phone interview. “Definitely it seems like the DOJ and FTC are taking a harder line. It’s certainly not better for Wall Street if the deals are more complicated or if they have to litigate.”
The Justice Department argued that consumers may face higher fares and fewer flights across a range of markets if the $14 billion airline transaction were to go through. Just two weeks ago, Office Depot assured shareholders that its $1.2 billion acquisition is on track to close by year-end as it seeks approval from the U.S. Federal Trade Commission. Meanwhile, Nielsen’s $1.3 billion bid to combine U.S. television and radio ratings data also is still under review after a second request for information from the FTC.
Attorneys for the two airlines defended the deal as good for consumers. They said they will fight the lawsuit and seek a trial by the end of the year. AMR owns American Airlines. Since the deal was blocked, US Airways shares slumped more than 16 percent through yesterday.
Office Depot agreed in February to exchange 2.69 shares for each share of OfficeMax in an attempt to revive a retailer that’s been losing sales to online rivals and Staples Inc., the largest U.S. office-supplies chain.
On Aug. 13, the day of the suit against AMR and US Airways, OfficeMax closed 53 cents below the value of the bid, the widest spread since May 15, according to data compiled by Bloomberg that accounts for the payment of a dividend. Yesterday, OfficeMax closed at $11.35, still 3.9 percent below the $11.81-a-share value of the bid.
Today, OfficeMax shares fell 1.9 percent to $11.13, while the value of the stock bid fell to $11.54.
“Arbs have had a hard time lately,” Steve Gerbel, founder and president of Chicago Capital Management LP, a Chicago-based hedge fund focused on merger arbitrage, said in a phone interview. “As a result, you can’t afford to lose money right now. If something starts to lose a little bit of money, you have to sacrifice a little bit and unwind your position.”
Gerbel and FBN’s Renck both said they expect the OfficeMax purchase to eventually receive antitrust approval.
“I really don’t think the AMR suit is going to change the perspective on OfficeMax-Office Depot,” Renck said. “It’s a whole other ball of wax.”
In April, the companies received a second request for information from the FTC. On July 29, Office Depot sent a letter to shareholders saying the company expected to receive FTC approval in time to close the deal by the end of 2013.
“The companies remain optimistic that the transaction will close at or prior to year-end,” Brian Levine, a spokesman for Office Depot, said in an e-mail yesterday.
There’s precedent for the FTC blocking deals in the office-supplies industry after Staples was prevented from acquiring Office Depot in 1997. Much has changed since then with Internet retailers like Amazon.com Inc. adding more competition and pushing prices lower, according to Bradley Thomas, a New York-based analyst at KeyBanc Capital Markets. Thomas, who expects the deal to be approved, recommends buying the shares of both companies.
Arbitron’s stock closed yesterday at $45.71, 4.8 percent below the offer from Nielsen. It was the widest spread since the deal was announced, and the third-biggest discount among North American deals valued at more than $500 million, data compiled by Bloomberg show.
Arbitron trading so far below the deal price just days away from a possible FTC ruling or request for more information implies that “the market assumes no deal,” Tim Nollen, an analyst with Macquarie Group Ltd. in New York, wrote in a report yesterday.
Today, shares of Arbitron fell 0.5 percent to $45.50.
“Nielsen continues to work with third parties, including regulators, to satisfy all customary closing conditions,” the company said in an e-mailed statement yesterday. “We look forward to announcing the completion of the acquisition of Arbitron as soon as possible.”
Nielsen, the biggest tracker of U.S. television ratings, agreed in December to buy Arbitron for $48 a share, giving it access to the largest source of data on the country’s radio listeners.
There’s still an 80 percent chance that the Arbitron deal will win approval, Chicago Capital’s Gerbel said. To satisfy regulators, Nielsen could agree to sell or license out a portion of the business.
At the time the deal was announced, Rich Tullo, an analyst at Albert Fried & Co. in New York, said he expected the deal would face antitrust scrutiny, owing to the two companies’ dominance in their respective markets.
“It’s a monopoly in radio and a monopoly in TV -- the FTC is going to want to understand the transaction,” Tullo said in an interview in December.
Nielsen Chief Executive Officer David Calhoun said on a July 30 earnings call that the New York-based company fulfilled a second FTC request for information about the deal, and that it expected to “have an indication of where things are” in terms of the approval process at the end of August.
“It is on them to come back to us,” Calhoun said. “The process has been very workmanlike and nothing has surfaced over the course of that process that’s either surprising or different than anything we thought about going into it.”
The New York Post reported this week that the FTC was sending out questionnaires to TV station owners about the deal, citing people it didn’t name.
“I don’t think investors are any more skeptical today than they were yesterday,” David Bank, a media analyst at Royal Bank of Canada, said in an interview. “It’s an important acquisition for Nielsen, but if it didn’t go through it wouldn’t be a disaster either. They’ll move on.”
While regulators have come down against the AMR-US Airways deal, that doesn’t mean they’ll stand in the way of the proposed purchases by Office Depot and Nielsen. Even if the companies do face opposition, they could still seek to negotiate remedies with antitrust officials to win approval.
For investors willing to bet that the two deals will go through, the widened spreads have created an opportunity to reap profits by buying the targets’ shares. Still, some investors may reckon that it’s better to be safe than sorry, according to Renck at FBN.
“In one week, traders got hit on three deals,” Renck said. “People probably just need to lighten up a little bit” on their positions, she said.
The antitrust case is U.S. v. US Airways Group Inc., 13-cv-01236, U.S. District Court, District of Columbia (Washington). The bankruptcy case is In re AMR Corp., 11-bk-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).