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The Plum Creek Timber-Weyerhaeuser Merger

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Nov. 10 2015, Published 9:33 a.m. ET

Merger arbitrage

To perform merger arbitrage, an investor generally buys the stock of the company being acquired, short-sells the relevant ratio of the acquirer’s stock, if applicable, and waits for the deal to close. When the merger is complete, the investor exchanges the stock of the company being acquired for the amount agreed upon in the deal.

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A big deal in the timber REIT space

On Monday, November 9, Weyerhaeuser Company (WY) agreed to buy Plum Creek Timber Company (PCL) for $8.4 billion in stock. The transaction will create the largest private owner of timberland in the United States (13 million acres). Weyerhaeuser will also examine strategic alternatives for its Cellulose Fibers business. Weyerhaeuser intends to institute a $2.5 billion share buyback immediately after the close of the merger.

Basics of the arbitrage spread

The Plum Creek Timber-Weyerhaeuser merger is subject to customary closing conditions and regulatory approvals. According to the press release, the deal is expected to close at the end of the first quarter or early in the second quarter of 2016. If you assume a closing date of May 15, 2016, then the spread is trading at an annualized rate of 1.4%. This is a very tight spread, which means the market might be looking for a competing buyer.

Other merger arbitrage resources

Other important deals include the merger between Cigna Corporation (CI) and Anthem (ANTM), which is set to close at the end of 2016. 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 REIT sector can look at the Vanguard REIT ETF (VNQ).

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