Wednesday, November 26, 2008

Arbitrage Opportunities – CEG and ROH

With the stock market declines that hedge fund and mutual fund redemptions as well as the deleveraging on Wall Street have caused, investors are definitely wondering whether they would ever be able to reach their financial goals. The increasing volatility of the markets has certain stocks trading at multi year lows, despite strong fundamentals, pushing yields to multi-year highs.

In this market turmoil, I believe that sticking to fundamentally sound strategies such as value investing or dividend growth investing is the way to escape the day to day volatility. I also believe that learning more about value investing is essential, as the market will present many once in a lifetime opportunities for investors.

One value investing strategy is merger arbitrage. In my previous post related to CEG merger, I outlined the basic idea behind this strategy. I still believe that CEG deal will close by the middle of 2009. At current prices and if the stock keeps its 8% current yield, enterprising investors could make about 18%.

Furthermore I have kept my eyes open for other arbitrage opportunities. Rohm and Haas (ROH) is another merger arbitrage play to consider. In July, Dow Chemical announced that it was considering acquiring ROH for $78/share in cash. You could check my analysis of ROH here.

On October 29 the shareholders of ROH approved the deal. Furthermore the Hass family, which owns over one third of Rohm-Haas, is a strong supporter of the deal, as it seeks to unload their position.

The merger is expected to close in early 2009, pending regulatory approvals, and the agreement provides that Rohm and Haas Company will retain its name and Philadelphia Headquarters.
An earlier article by Jimmy Lathrop listed some of the risks that could prevent this arbitrage opportunity to work out. The strongest reason in my opinion is this one:

1. There is a chance that the credit crisis could slow or scuttle the deal. Even though Warren Buffett arranged part of the financing to include sale of equity interests with Berkshire Hathaway (BRK.A) as well as the Kuwait Investment Authority, the main underwriters to pay the shareholders of Rohm and Haas Company will come through a loan provided by Citigroup (C), Morgan Stanley (MS) and Merrill Lynch (MER). To put things mildly, there is significant uncertainty as to whether one, two or all three of these banks who signed this agreement on July 10, 2008, will be a functioning entity on January 15, 2009.

I believe that ROH is a buy at these levels as long as the deal does not get derailed. Furthermore the stock is paying 41cents/quarter in dividends, which is a decent payment while you are waiting for the deal to close.

Full Disclosure: Long CEG and ROH

Relevant Articles:

- Dow Chemical (DOW) To Acquire Rohm and Haas (ROH)
- Constellation Energy (CEG) Merger Arbitrage Opportunity
- ROH Dividend Analysis
- Zecco Online Discount Stock Brokerage Review

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