Merger arbitrageurs expect CME Group Inc.s bid for Nymex Holdings Inc. to succeed, but they also believe the Chicago derivatives powerhouse will have to sweeten its offer for the parent of the New York Mercantile Exchange.
The CME is offering $36 in cash plus 0.1323 of its share for each Nymex share. At the CME closing price of $457.65 on Tuesday, the offer values Nymex at $9.15 billion, barely a 3% premium over Nymexs $8.89 billion market capitalization.
It (arbitrage spread) is trading too tight at 3%. Anything below 6% shows speculation the target will get price improvement, get a bump, as we say, or close early, and that it (an early close) is unlikely, a trader at a New York hedge fund specializing in merger arbitrage said, noting that some Nymex shareholders are hoping for the CME to sweeten its offer by $2 billion.
While merger arbitrage is relatively straightforward and common, if the deal falls through, the strategy can result in losses because the stock price of the acquirer typically bounces back but the target company stock slips.
A lot of people think its a low-risk deal, but that does not necessarily mean it is because there is an antitrust risk here, the trader, who asked not to be named, also said.
Hedge funds, including Kinetics Asset Management Inc., Pleasantville, N.Y., with 1.69%, and Wellington Management Co., Boston, with 1.07%, are among the institutional holders of CME. Kinetics also owns 1% of Nymex, while asset manager Loomis, Sayles & Co., Boston, owns 1.42% of the energy exchange. In addition, hedge funds Duquesne Capital Management Co., Pittsburgh, and Citadel Investment Group LLC, Chicago, own 1.13% and 0.74% of Nymex, respectively.