Looking at the acquisition of Florida Rock (FRK) by Vulcan Materials (VMC). It was announced in February, approved my shareholders in August and currently pending regulation approval. It's a stock and cash deal at $67/share. Stock currently trades at $62/share, so that represent an arbitrage opportunity that amounts to about 8% return on the transaction. Transaction is expected to be completed by the end of the year, so that's an 8% return for less than two months and a 59% compounded annual return.
One thing I'm not too excited about is that it's not a cash-only deal, so that part somewhat complicates the evaluation of the arbitrage opportunity. On the upside, Vulcan is currently severely underpriced (according to the Morningstar valuation), this means that even if you get Vulcan's stock in return for Florida Rock shares, it still wouldn't be that bad.
Here are some excerpts from their merger web site:
What are the terms of the transaction?Additional resources:
Under the terms of the agreement, Vulcan Materials shareholders will receive one share of common stock in a new holding company (whose subsidiaries will be Vulcan Materials and Florida Rock) for each Vulcan Materials share. Florida Rock shareholders can elect to receive either 0.63 shares of the new holding company or $67.00 in cash for each Florida Rock share, subject to proration, to ensure that in the aggregate 70% of Florida Rock shares will be converted into cash and 30% of Florida Rock shares will be converted into stock.
What’s the strategic rationale behind this transaction?
For Vulcan Materials, combining with Florida Rock further diversifies and broadens the Company’s reach and regional exposure, providing the Company with a significant presence in Florida – one of the fastest growing markets for aggregates in the U.S. – and bringing Vulcan Materials approximately 2.5 billion tons of reserves in markets where reserves are increasingly scarce.
For Florida Rock, the transaction offers shareholders an opportunity to receive a significantly increased dividend, as well as the opportunity to participate in the upside of the combined company.
- To learn more about merger arbitrage, read: How to Make Money from Merger Arbitrage.
2 comments:
So I got in with 16 shares FRCK and unfortunately did not get my preference of cash but 10 shares of Vulcan so right now i'm down more than 10% but I'm gonna hold on to Vulcan and hopefully will recoup my $. Next merger arbitrage attempt I will definitely look for cash only deals.
Vulkan is discounted pretty steeply right now, so if you wait I think you should be able to recoup your investment and get a decent return. Of course, the main question is WHEN it would rebound. Good luck!
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