As doubts grow over a Halliburton (NYSE: HAL) and Baker Huges (NYSE: BHI) deal, a merger-related exchange traded fund could capitalize off the widening arbitrage opportunity.
The second largest holding in the Index IQ Merger Arbitrage ETF (NYSEArca: MNA) is BHI at 7.3% of the underlying portfolio.
The oil services space has been bubbling with a major M&A deal after Halliburton announced a buyout deal of rival Baker Hughes for $34.6 billion back in mid-November 2014.
However, as the two oil services giants began talks, many were wary of potential antitrust issues, given the level of the consolidation, New York Times reported.
The two companies are the second and third largest in the oil services space, and the merger would have helped the new firm better compete against the much larger Schlumberger (NYSE: SLB). For instance, the top holdings in the Market Vectors Oil Service ETF (NYSEArca: OIH) include SLB 20.9%, HAL 12.7% and BHI 8.2%.
As the merger deal keeps dragging on, growing doubts over regulatory red-tape may have created a high-reward opportunity for risk-tolerant investors, Reuters reports.
Specifically, MNA provide investors with a diversified approach to a group of takeover targets. The fund capture the spread or difference between a stock’s trading price before a deal is announced and its eventual takeover price. Currently, BHI is trading at about an 8% discount to the $67 takeover price that Halliburton offered as of Tuesday’s close. The deal has been extended to close by December 1.
“It’s a wide spread, which people might want to take advantage of,” Roy Behren, portfolio manager at Westchester Capital Management, said in the Reuters article.
Nevertheless, merger experts warn that the widening spread between BHI’s current price and takeover target only reflects the growing pessimism that a deal will be completed this year.
The M&A space has been hit with some high profile deals that failed to take off due to anti-trust concerns. More recently, Comcast (NasdaqGS: CMCSA) abandoned a $45 billion offer for Time Warner Cable (NYSE: TWC). TWC is 5.8% of MNA, and ProShares Merger Arbitrage ETF (NYSEArca: MRGR) also includes a position in TWC.
For more information on the energy sector, visit our energy category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.