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Life Time Fitness Deal: Material Adverse Change Explained, Part 1

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The Life Time Fitness merger and the MAC clause

The MAC (material adverse change) clause is one of the first things arbitrageurs look at. In the Life Time Fitness merger, the MAC clause lays out the circumstances under which the private equity consortium can back out of the deal with Life Time Fitness (LTM).

Let’s take a look at the specific conditions that could stop this deal. In private equity transactions, arbitrageurs take a very close look at the MAC.

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The MAC clause, paraphrased

As a general rule, MAC clauses follow a similar format. Nearly anything that has a material adverse effect on the company will be considered a MAC, but there are exceptions to that rule.

Please note that the following MAC clause has been paraphrased here to limit the legalese. You should still read and understand the actual language in the merger agreement.

“Company material adverse effect” means any fact, circumstance, occurrence, effect, change, event, or development that, individually or in the aggregate, is or would reasonably be expected to be materially adverse to the business, assets, financial condition, or results of operations of the company and its subsidiaries, except for certain carve-outs.

Please note that this is the standard MAC language. A description of the carve-outs follow in the next two parts of this series. There’s a disproportionate effect clause, which means that no carve-out can have a disproportionate effect on Life Time Fitness relative to companies of a similar size in the industries in which Life Time Fitness operates. As well, only incremental disproportionate effects will be taken into account.

Merger arbitrage resources

Other important merger spreads include the deal between Salix Pharmaceuticals (SLXP) and Valeant Pharmaceuticals (VRX) or the merger between Pharmacyclics (PCYC) and AbbVie (ABBV). For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

Investors who are interested in trading in the consumer discretionary sector should look at the Consumer Discretionary Select Sector SPDR Fund (XLY) or the iShares Global Consumer Discretionary ETF (RXI).

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