Last year I participated in the merger arbitrage between Primo Water and Glacier Water, calling it the merger arb of the year. Because of the unusual deal structure it will take a long time to know exactly what the result will be, but today the last Primo Water shares were released from escrow which clarifies at least one piece of the puzzle. I expected that all the escrow shares would be delivered to former Glacier Water shareholders, and that proved to be the case. Of course, just the fact that we did get all the shares doesn’t mean that it was a sure thing. Risks that didn’t materialize are unobservable, and are the main reason why making sense of investment results is so hard. But at least it’s a clue that perhaps I had the right idea.
With the last Primo Water shares sold my preliminary result is looking as follows:
|Description||Date||# of PRMW shares||Realized price||Net cash flow|
|Buy 1 GWSV share||10/24/2016||–||–||-$22.98|
|Cash merger consideration||12/26/2016||–||–||$12.1761|
|Initial share payment||12/26/2016||0.252975||$12.73||$3.2204|
|1st escrow release||6/29/2017||0.154838||$12.83||$1.9866|
|2nd escrow release||9/11/2017||0.154838||$11.69||$1.8101|
|3rd (final) escrow release||12/20/2017||0.309676||$12.75||$3.9484|
As you can see, the result so far isn’t exactly a home run, but part of the reason is that the share price of Primo Water dropped and I realized an weighted price of $12.57 which is 9.0% lower than the $13.81 the stock was trading at when the position was initiated. In theory I could have hedged my Primo Water exposure, but in practice this isn’t easy nor is it free. So this is just variance I will have to accept. Sometimes it will hurt results, sometimes it will boost them.
But more importantly, this isn’t the whole merger consideration yet. The warrants, another part of the deal, still have 4 year left till expiry, have a strike of $11.88 and are worth $3.87 at the moment (assuming 30% volatility). Since we got 0.54 warrant per GWSV share that means that even with a slightly lower Primo Water price the expected payoff is still looking pretty good. What will happen next will mostly be noise from an investment process perspective, but nevertheless, if this blog is still alive in four years time I will let you know how this ended :).
Author has no direct position in Primo Water, but owns the warrants