Arbitrage

July 20 - Conclusion of the CFIUS investigation was announced so this takeover is set to go through. The stock is indicating it will open near $4.90 so there is not much more upside here, but if you bought when recommended in the $4.45 range you just made 12% in a week and a half!

July 9 - The only arbitrage play we currently have on is Alter NRG (NRG), a stock we owned already that was given a $5.00 per share takeover offer. The stock initially traded around $4.80, but since has slowly pulled back to $4.45, where it could be an attractive entry for people not in th name looking to make a quick 12% if the deal closes. Unlike many other arbitrage plays, this is a stock we already liked and owned, so we would feel comfortable adding more, even though the premium was over 100% from the previous trading price. This company creates energy from waste using plasma gasification, which is both a noble and profitable enterprise. Before getting into this name we owned a similar company, which was taken over, then shortly after we rolled those profits into Alter NRG they also received their takeover offer, so there is clear demand here.

July 9 - O'Hara has won this battle for the time being as Alfa is walking away. Clearly O'Hara had to be hedged here in some way where they did not want the immediate upside or they were looking at their entry point, not the valuation of the company, because Pacific Rubiales has now received mostly sell ratings and the stock looks set to return to trade around the $3 range. Common sense did not win here and all shareholders are being punished, including us, fortunately it was a small, speculative arbitrage play in our portfolio, but it is still quite disappointing that O'Hara would proudly make all shareholders suffer. We will hold on a bit longer to see how this plays out, but we have no intention of holding for the long-term, this company has lots of problems and a takeover is their best avenue. It looks like we made the wrong call on this one and will take a hit, but that is the danger with arbitrage.

July 7 - The saga continues, as O'Hara says the company is worth more than $9 a share, while Alfa is rumoured to be mulling an increased offer, but not as high as $9/share. This all just appears to be hard-ball negotiations, it would make no sense to allow Alfa to walk away without any other offers, let Pacific Rubiales' stock price tank and force the company to return to fighting to stay alive in this current price environment. With the price of Pacific Rubiales bouncing between $4.53-$5.75 during this battle, any entry point would provide great returns at a $6.50 premium, which rationally should be a worst-case scenario. However, individuals and companies do not always act rationally so there is still downside risk in the possibility that the guaranteed cash premium is denied and Alfa is allowed to walk away. Our views remain that something will be agreed upon, at least to satisfy proxy voting firm Glass Lewis to make an acceptance of the offer still plausible even without O'Hara's support.

June 26 - A day after Alfa's comment that their offer is fair and will not be raised Pacific Rubiales (PRE) has closed just above $5. Next week we will be closely monitoring this stock, looking for option plays on this stock. Be cautious, there is still downside risk in this name (it was still trading at half this value at the lows not long before the takeover offer), but below $5 we see up to 30% upside ($1.50 to the $6.50 offer price) and about 30% downside ($1.50 to the $3.50 price immediately before the takeover offer). With options we will look to profit from the near-term volatility that still keeps the stock trading in a narrow range, with full exposure to the long-term upside.

June 8 - TD has upgraded Pacific Rubiales (PRE) to Tender and also sees the great upside (now 13%) from here relative to the downside risks, so today is a great day to accumulate some shares before more people come to this realization.

The stock peaked about 2% above our entry price on this upgrade, so we sold half the position and are waiting for another entry point to accumulate more.

Multiple major shareholders have spoken out against the $6.50 cash offer for Pacific Rubiales (PRE). With these majority shareholders against the deal the stock has fallen and it now sits approximately 10% below the offer price, since the takeover likely won't go through as it stands without the support of these shareholders. However, it is highly unlikely these same shareholders would be willing to let the stock fall back down to previous levels before the takeover approach, so it only makes sense that they must either arrange a better deal, or submit to the one already in place. Decent upside and when a company with a beaten down stock price is in play like this the downside is usually limited.

#PRETO #NRGTO