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What Will Arbs Think of the MRD-RRC Deal?

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Arbitrageurs will probably want to have some of this deal in their portfolios

This transaction is a classic merger arb core position. The companies are reasonably big and liquid, the deal makes strategic sense, and there doesn’t appear to be any meaningful regulatory risk. The transaction has a decent spread and a reasonable risk-to-reward ratio.

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Beware of Range Resources’ vote

One risk with the Memorial Resource Development (MRD)-Range Resources (RRC) deal is the Range Resources shareholder vote. Range Resources was hit about 8% in the days after the deal was announced. It’s expected that the buyer’s stock will get hit on deal announcements. Arbitrageurs hedge their exposure and set up the spread. That said, an 8% decline in a few days can make for some surly shareholders. Given the high multiple paid versus the comps, they could theoretically have an issue with the vote. The other risk is that Range Resources gets hit hard enough to attract a buyer itself. Even if the buyer expresses interest in buying Memorial Resource Development as well, the spread will still widen.

That said, the reception from the analyst community has been reasonably positive. The deal is accretive to cash flow right off the bat. It doesn’t appear to be that risky of a transaction. Arbs are always looking for “safe” deals to diversify their risk across deals.

Other merger arbitrage resources

Other important merger spreads include the deal between Energy Transfer (ETE) and Williams Companies (WMB). For the basics on risk arbitrage investing, please refer to Merger arbitrage must-knows: A key guide for investors.

Investors who would like diversified exposure to the financial sector should look at the S&P SPDR Energy ETF (XLE).

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