March 31, 2008

CHC Helicopter Buyout Status

I have invested in CHC Helicopter a buyout target for the home to earn an arbitrage profit in this mundane market. The uncertainty in the credit markets and the lack of risk taking investors made the price behaviour of this buyout out of the norm. I guess most buyout candidates are behaving in an abnormal way.

I have expected the stock to trend higher in a steady matter towards the buyout price, however it is stuck at the buyout announcement price level and it has been over 30 days since that day. As you can see in the chart the price fluctuated slightly around the current level.

The credit markets trouble is the prime culprit for this behaviour. Investors have decreased the probability of this deal being completed due to the credit market issues. An example of the unraveled deals is Clear channel buyout. The buyout is not happening any more and all parties involved in that transaction are in court trying to settle it. The volume of deals completed and announced has came to a trickle. As you can see in the table there was only 5 deals completed this quarter; a far cry from the volume a year ago.

However I still think this deal will get done as and I hold to my probabilities I outlined in my original post for the following reasons:

  1. deal size is much smaller and banks can float the debt.

  2. the deal was announced last months in the midst of the credit crises and I am sure all the financing terms and conditions have adjusted for the appropriate risks, so there is no covenant lite type of clauses.

  3. there is a substantial equity component in the deal from the sponsor.

For those reasons I will continue holding onto my position in CHC. On April 3rd the underwriters will meet with CHC and their commitments are due by the end of April. So until then the price of CHC will continue to move up and down depending on the news on the credit markets.

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