uploads///Tumi Tumi basics

Will Arbs Impact the Samsonite-Tumi Deal?


Mar. 9 2016, Published 7:55 a.m. ET

Spread is very tight

Compared to all of the other risk arb deals out there, a 2.9% annualized spread isn’t all that appetizing. Indeed, it probably doesn’t cover the cost of capital. The risk-to-reward ratio of 21x is the classic “picking up nickels in front of a steamroller” type of trade, where a broken deal will probably ruin your month. Given all of the other deals out there trading at much wider spreads, why should you invest in this one?

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The tight spread and large risk-to-reward ratio is telling you that the market is assigning some possibility of a bidding war. Certainly a $1.8 billion transaction would be easy for Coach (COH) or Burberry to buy. Premium brand names tend to command high multiples. We know that the multiples being paid are slightly higher than the admittedly poor comparable transactions. Is 14.5x earnings before interest, tax, depreciation, and amortization too much to pay for a premium brand? Not necessarily.

Arbs will probably have a small position just in case there’s a bidding war. They will scale in if the spread widens. The name of the game is to wait for the preliminary proxy and immediately go to the background section. If Tumi (TUMI) ran a sale process, then the stock is probably a sale given where the spread is trading. In fact, some arbitrageurs will short tight spreads as a portfolio hedge. However, this probably isn’t the ideal spread. Private equity transactions are usually better candidates.

Other merger arbitrage resources

Other important merger spreads include the Cigna (CI)-Anthem (ANTM) deal. It’s slated to close in 2H16. Another important transaction is Apollo’s purchase of ADT (ADT). 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 consumer discretionary sector should look at the Vanguard Consumer Discretionary ETF (VCR).


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