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Thursday, July 20, 2017

Analyst: Activist Investor Unlikely to Stop EQT-Rice Energy Deal

From Seeking Alpha:
In the finance community, merger arbitrage is sometimes referred to as “a business of picking up nickels in front of a steamroller.” By contrast, the EQT Corporation (EQT)–Rice Energy (RICE) merger arbitrage situation increasingly appears to be an exercise of “picking quarters in front of a scarecrow.” 
Following the stir created by the activist hedge fund JANA Partners, which is advocating against the merger and demanding immediate separation by EQT of its upstream and midstream businesses instead, the arbitrage spread has widened dramatically and is currently at a level that makes expected return on RICE and EQT to the assumed transaction closing materially differential, presenting investors participating in these two stocks with a dilemma. 
Based on July 14 closing prices, a position in the EQT-RICE merger arbitrage pair would earn a ~6% annualized return if the transaction closes in mid-December. By the standards of the merger arbitrage trade where the return is often measured versus zero, this is a very lavish return. The unusually wide spread obviously indicates strong concerns (not to say fear) and disengagement by many arbitrageurs. 
Given the operational merits of the proposed combination and the endorsement by investors so far, a case can be made that in spite of JANA’s activism, the transaction has high likelihood of being approved by EQT shareholders and will likely close as planned.
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