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Could the Zulily Transaction Get Competitive?


Dec. 4 2020, Updated 10:52 a.m. ET

Could this deal get competitive?

For merger arbitrage professionals, competitive deals can make your quarter. If you get two companies bidding against each other, a 1% gross spread can easily become 10% by the time everything is said and done. We saw that happen in the Salix Pharmaceuticals deal. Could the Zulily (ZU)–Liberty Interactive (QVCA) transaction be broken up by an interloper?

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The founders are on board, but what about the biggest outside shareholder?

Generally speaking companies do tender offers and exchange offers for two reasons—either they are so small that it doesn’t make sense to schedule a vote, or the buyer wants to move fast. When the buyer wants to move fast, that usually means it’s worried about another buyer coming in over the top. Which company might that buyer be? None other than Alibaba (BABA), which owns 17% of Zulily.

In this case, however, you have a tender and support agreement between the founding members and Liberty Interactive. These shareholders have agreed to the Liberty Interactive tender offer. The minimum tender requirement is a majority of the voting shares and these shareholders represent 45% of the vote. We’ll have to wait for the official tender offer document to be filed to get the background on the transaction, but you would think that the founders would have taken their biggest outside shareholder’s temperature on an acquisition before agreeing to Liberty’s offer.

Deal comparisons

Arbitrageurs will often compare the price the acquirer is paying to other deals in the same industry. This is always more art than science, since no two companies are alike, interest rate environments change, and so forth. However, we do have two deals we can look at:

  • Liberty Interactive’s acquisition of QVC
  • Men’s Wearhouse’s acquisition of Jos. A. Bank

These two transactions are about the closest comparisons we have to the Zulily deal, but they really aren’t great at that. With the ZU-QVCA deal, Liberty is paying about 1.6x trailing 12-month revenues and 72x trailing 12-month EBITDA (earnings before interest, tax, depreciation, and amortization). The revenue multiple is about right, but the EBITDA multiple is at the high end. That’s to be expected—a fast-grower like Zulily is going to be plowing its cash back into the business.

Merger arbitrage resources

Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) or the merger between Freescale Semiconductor (FSL) and NXP Semiconductor (NXPI). For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

Investors interested in trading in the tech sector should look at the Technology Select Sector SPDR Fund (XLK).


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