Investing

I have made some good risk arbitrage trades most recently on Corvette and Cape Lambert and before that on Dow and Rohm & Hass. There is an opportunity now in Felix resources.

Yanzhou Coal ( YZC ) have agreed to purchase Felix Resources. The Australian Foreign Investment Review Board was a major sticking point. That is now resolved with the conditional approval provided yesterday. Felix closed at $16.75 on Friday 23rd. The YZC offer price is $17.5. That is 4.5% in 2 months or 27% annualized. Though that isn’t the exciting opportunity.

The YZC bid for Felix was barely adequate when it was announced. On the basis of coal price and market moves since the August announcement the YZC offer is too low. I estimate that there is now a much better than 50% chance of a competing bid (or an increased offer from YHZ):

• A DCF of Felix values it closer to $24-$30
• YHZ have accepted onerous conditions from the FIRB
• The market for M&A has reopened
• There is some minor discontent about the deal within FLX shareholder ranks.

I suggested in this post on sniping Felix that a competing bid would wait until November. I also identified the potential alternate bidders for Felix in another post. BHP and Vale are obvious suitors. Xstrata was a no show at that time but things have improved for them since and they have an obvious advantage with their Ulan mine next to Moolarben.

The trade and the odds

Buy FLX at 16.75;

* including dividends

The probability adjusted profit is $2.78 over a probability adjusted period of 5 months for an annualized profit of 40%.

Short Term

If your timeframe is just a risk arbitrage on this position, then deal fails case becomes;

The probability adjusted profit is $1.78 over a probability adjusted period of 2.9 months for an annualized profit of 44%.

It’s not often that you get the opportunity to make a risk adjusted profit of 40%+ where your downside is limited by the cheapness of the assets.

posted by Neil  # 10:14 PM