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(1)Aphria $APHA is trading for ~$25.
If the Tilray $TLRY merger goes through Aphria investors get $38
A 55% return is up for grabs, but it doesn't come for free.
Time for a thread on "merger arbitrage"
If the Tilray $TLRY merger goes through Aphria investors get $38
A 55% return is up for grabs, but it doesn't come for free.
Time for a thread on "merger arbitrage"
(2)Merger arbitrage is simply betting a merger between two companies will close when other investors think it won't.
This bet takes the form of a spread between the deal price and the current stock price of the company being bought.
This bet takes the form of a spread between the deal price and the current stock price of the company being bought.
(3)Company A is buying company B for shares of stock. Company B trades for $10 but company B shareholders will get $12 worth of company A stock if deal closes.
So there is 20% upside for owners of company B stock
*IF the deal closes and
*IF company A's stock price doesn't fall
So there is 20% upside for owners of company B stock
*IF the deal closes and
*IF company A's stock price doesn't fall
(4)The risk that company A's stock price falls is a big one and the pros don't want to take that risk.
They only want to bet the deal closes. To protect themselves from this risk they HEDGE.
What is hedging?
They only want to bet the deal closes. To protect themselves from this risk they HEDGE.
What is hedging?
(5)To hedge they short the stock of company A (borrow it, sell it and buy it back later in the market before returning the shares to the broker they borrowed from)
And buy the stock of company B
And buy the stock of company B
(6) Now the only risk they face is that the deal won't happen. This is arbitrage
The "merger arb" or spread is locked in as long as the deal goes through.
But in the case of $TLRY and $APHA there is a wrinkle..
The "merger arb" or spread is locked in as long as the deal goes through.
But in the case of $TLRY and $APHA there is a wrinkle..
(7)Deal spreads are usually 1%-20%, not 50%-100% in the case of Aphria.
so whats going on?
The answer comes from the Gamestop $GME saga
so whats going on?
The answer comes from the Gamestop $GME saga
(8)When investors short Tilray they still would lose money if Tilray's stock price goes up.
So if Tilray pulls a Gamestop and goes to the moon, big investors could lose millions on their supposedly locked in return.
They are scared and aren't willing to short Tilray
So if Tilray pulls a Gamestop and goes to the moon, big investors could lose millions on their supposedly locked in return.
They are scared and aren't willing to short Tilray
(9)Without these merger arb investors shorting Tilray and buying Aphria, the spread between the two has ballooned as Tilray's share price exploded higher this week.
But why can't retail investors do the same thing and drive the merger spread down
But why can't retail investors do the same thing and drive the merger spread down
(10)Brokers have decided they don't want to lend any Tilray shares to retail investors so shorting is a no go.
This means you and I have one choice to potentially make 55% in 4 months.
We buy Aphria stock or we don't.
But there's more.....
This means you and I have one choice to potentially make 55% in 4 months.
We buy Aphria stock or we don't.
But there's more.....
(11)Your upside/downside thinking goes like this...
UPSIDE: Deal closes, Tilray stock price stays where it is, I make 55% in 4 months
DOWNSIDE: Tilray stock falls to January levels ($12) and Aphria investors get $10/sh 60% less then where the stock currently trades ($24.50).
UPSIDE: Deal closes, Tilray stock price stays where it is, I make 55% in 4 months
DOWNSIDE: Tilray stock falls to January levels ($12) and Aphria investors get $10/sh 60% less then where the stock currently trades ($24.50).
(12)55% upside and 60% downside
It's basically a coin flip
If you are more than 50% sure Tilray's stock price will be at or above $45/sh in 4 months, put on the trade.
Otherwise, move on to fight another day..
It's basically a coin flip
If you are more than 50% sure Tilray's stock price will be at or above $45/sh in 4 months, put on the trade.
Otherwise, move on to fight another day..
(13) To hear from a merger arbitrage expert on how he feels about the chances this merger goes through + everything else mentioned in the thread watch this video
