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What’s the Main Regulatory Risk of the Envision-Amsurg Deal?

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Spread is trading about right

In the risk arbitrage world, a 2.8% annualized return is pretty small given there’s some overlap that could concern regulators. The main regulatory risk would be the timing risk. The chance of regulators blocking appear to be low since the overlap is in one area, the companies describe the Market as “fragmented.” Envision (EVHC) doesn’t even mention Amsurg (AMSG) as a competitor.

Arbitrageurs will probably want to have some of this deal on the pad simply because it’s a big, strategic deal. As a general rule, mergers of equals are tough spreads to get excited about. They trade tight (meaning the potential profit is limited) because the downside is manageable. If a competing buyer comes in, at least you’ve done the work and could build your position as everyone else tries to get their heads around the situation.

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A competing buyer is possible

It doesn’t appear that either company ran a process to sell their respective companies. We’ll have to wait until the preliminary proxy statement comes out to get the background of the transaction. If the companies ran an auction, came up empty-handed, and ended up with each other, then the 2.8% return is what you are going to get.

The bigger issue is that a competing bidder could come in, but it could bid for the one that you’re short. Both companies are in play at this point.

The bottom line is that it’s hard to get too excited about this merger. If the spread widens out to a mid-single digit range, it might look appetizing. But at these levels, there are better opportunities out there.

Other merger arbitrage resources

Other important merger spreads include the Cigna (CI)-Anthem (ANTM) deal. It’s slated to close in 2H15. 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 healthcare sector should look at the S&P SPDR Healthcare ETF (XLV).

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