Yesterday the merger of Willbros Group with Primoris Services was successfully completed. When I wrote about the merger I thought that there was little that could derail the deal, and that it would close fast, and that proved to be the case. Making a 9.1% return in two months time is as good as it gets in the merger arbitrage game.
However, just because that this deal was completed successfully doesn’t really mean that it was a good bet. I think it was, but last week I got a not so nice reminder that deals with companies that aren’t in the best financial position (like Willbros) can quickly get very ugly when things don’t go as planned. I had a position in Rosetta Genomics, a company that was flirting with bankruptcy as well before Genoptix agreed to take it over. After it (finally) managed to secure shareholder approval for the deal I thought that there was also little that could derail it, until Genoptix claimed the existence of a “Material Adverse Effect” (no details were given).
The stock has cratered since that announcement because it’s unlikely that there will be anything left for equity holders in a bankruptcy scenario. Looking back at it in hindsight I don’t think I made an error in betting on this merger, but the unfortunate reality is that there is always a small possibility of a deal failing for some unexpected reason. As long as you size your positions accordingly it shouldn’t be a problem, although it’s of course never going to be nice…
Long Willbros Group (since the cash payment hasn’t been received yet by my broker)
Yesterday Willbros Group (OTC:WGRP) announced that it is being acquired by Primoris Services (NASDAQ:PRIM) in an all-cash deal for $0.60/share. With the stock currently trading at $0.55 a juicy spread of 9.1% remains. The biggest reason for the spread is presumably the fact that Willbros Group was on the verge of a bankruptcy before the merger was announced, and if the deal fails the downside is possibly close to 100%. If you look at the stock price of the company you can see it has been a train wreck the last half year. Willbros Group was trading above $3/share in November 2017 before dropping to $0.15/share earlier this week. A non-fundamental reason that might be a contributing factor to the spread is the fact that the stock was delisted from the NYSE this week as well and resumed trading on the pink sheets.
So it’s a situation with a bit of hair, but I also think that this is a deal that is almost certain to be completed, and because of that it’s still a bet with an attractive risk/reward ratio. I don’t think there are any meaningful regulatory hurdles to complete this deal, Primoris can finance the deal using cash on hand and existing credit facilities and “certain Willbros directors and shareholders”, representing ~17% of the outstanding shares, have agreed to vote in favor of the transaction. Given the fact that the $0.60/share offer represents an almost 300% premium to the last traded price I think getting enough other shareholders on board shouldn’t be a problem. So unless there is some skeleton still hiding in a closet somewhere there is little that could derail this deal, and it is expected to close soon: the second quarter of 2018.
Long Willbros Group