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What Is the Value of the Apollo-ADT Deal?

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Merger arbitrage

In 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 on in the deal.

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A big deal in the home security sector

On February 16, 2016, Apollo (APO) and ADT (ADT) announced that Apollo will buy ADT in a $6.9 billion deal. Including debt, the deal’s value is $12.3 billion. The deal will be a cash transaction, and ADT will merge with Apollo’s Protection 1 security firm. The deal includes a go-shop period where ADT can solicit other bids.

The companies are aiming for an end-of-June close. This will depend on the antitrust review and whether US authorities issue a second request. The home security market is relatively fragmented. However, there is always the risk that the antitrust authorities take a closer look.

The spread is trading at $2.36 gross, or about 6%. If you annualize the spread out to the expected close and include the dividends, it is trading closer to 19%. The wide spread is a reflection of the wide berth the Market is giving private equity deals these days given the difficulty in getting financing.

Merger arbitrage resources

Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) and KLA-Tencor (KLAC) and Lam Research (LRCX). 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 tech sector can look at the iShares Global Technology ETF (IXN).

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