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Possibilities of a Topping Bid for Solera Holdings

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Could this deal get broken up?

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% spread by the time all is said and done.

For example, we saw the transaction between Salix Pharmaceuticals (SLXP) and Valeant Pharmaceuticals (VRX) get competitive, and arbitrageurs were rewarded with an 11% return over three weeks. In the same way, could the Life Time Fitness merger get broken up by an interloper?

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Solera’s strategizing prior to the deal

In August, press reports indicated that Solera Holdings (SLH) had approached private equity buyers. Pamplona Capital Management and Thomas Bravo—two big private equity firms—were mentioned as potential buyers. But the company didn’t confirm or deny the content of the press report.

The critical question is, then: What sort of process—if any—did Solera run prior to the deal? We’ll find out once the preliminary proxy comes out. But as a general rule, consortiums usually indicate if there was a formal process run.

So the bigger question may then be: Who else could buy the company? As a general rule, private equity firms don’t get into bidding wars with each other. Unfortunately, most of Solera’s competitors are also private (actually, the named competitors in Solera’s 10K were bought by private equity firms as well). So we can’t see who would have the resources to buy them.

The consortium targeting Solera now—which includes Vista Equity Partners, Koch Industries, and Goldman Sachs—is paying a multiple of 5.4x trailing 12-month revenues and 14.7x trailing 12-month EBITDA.

One of Solera’s competitors, CCC Information Services, was bought by KKR in 2013 at 2.7x revenues and about 10x EBITDA. The rest of the comps aren’t great, but the average comp was 2.8x revenues and 8.6x EBITDA, giving Solera a richer multiple than similar transactions.

Merger arbitrage resources

Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) and the merger between Freescale Semiconductor (FSL) and NXP Semiconductor (NXPI). For a primer on risk arbitrage investing, read the series Merger Arbitrage Must-Knows: A Key Guide for Investors.

Investors interested in trading in the technology sector should look at the S&P SPDR Tech ETF (XLK).

In the next part of this series, we’ll look at the antitrust risks in the Solera transaction.

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