To perform merger arbitrage, an investor will generally buy the stock of the company being acquired, sell short the relevant ratio of the acquirer’s stock, if applicable, and wait for the deal to close. When the merger is completed, the investor will exchange the stock of the company being acquired for the deal consideration.
The MarkWest-MPLX merger spread, where an investor buys one share of MarkWest Energy Partners (MWE) and sells short 1.09 shares of MPLX (MPLX), is trading at an annualized rate of -6.1%. This means that if investors set up the merger spread and wait for the deal to close, which should take about five months, they’ll make a -6.1% return. This means investors expect either a competing bidder or a bump in the consideration.
A big deal in the midstream space
The combined company will be the fourth largest MLP by market cap. MPLX is much smaller than MarkWest, or $4.4 billion market cap vs. $13 billion market cap. But it’s backed by Marathon Petroleum (MPC), which is a $31.2 billion market cap company. In fact, this deal is actually Marathon Petroleum buying MarkWest via its MPLX subsidiary.
Will MPLX performance jeopardize the deal?
MPLX’s stock price was hit hard on the deal announcement, falling 15%. The stock has continued to fall, which is lowering the value of the transaction. At this stage of the game, the negative spread means that MPLX is going to have to worry about the MarkWest vote.
The stocks are telling you that the market expects either MPLX to bump the consideration paid to take into account the post-announcement performance of MPLX or another buyer to take a look.
Other merger arbitrage resources
Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL). For the basics on risk arbitrage investing, please refer to Merger arbitrage must-knows: A key guide for investors.
Investors who would like diversified exposure to the financial sector should look at the Energy Select Sector SPDR ETF (XLE).