Closing CHC position

I have sold my CHC shares today at $31.95 on the news that the buyout will be delayed. I am leaving on the table $.73 or 2.4% on my original purchase price. The investment generated 5.5% (including a dividend payment).

It is time to move on from this investment as the uncertainty in a special situation like this does not warrant the extra return. I have no doubt that the transaction will close eventually but the delay can ruin your rate of return.

The relative performance of the buyout outperformed the S&P but failed to outperform the TSX. The TSX returned 9.25% while the S&P lost 3% over the same period. I think the better benchmark for CHC is the TSX as it was a Canadian company but to make myself feel better and look good for the reader I will claim that I have outperformed the S&P.

Although on annualized basis buyout investing or risk arbitrage can yield north of the 20% p.a., I do not pursue it aggressively. I am opportunistic with this strategy. I will only invest in situations where I know the players involved and I can buy risk in face of uncertainty. Also, I try to avoid complicated deals that have a lot of moving parts. This buyout was simple and all cash offer, easy to understand and value.

I do believe that risk arbitrage is no place for a retail investor. There are multiple ways where a buyout can fail and results can be disastrous.

In the CHC situation, I had a good knowledge of First Reserve and their track record and investment strategies. However the market was preoccupied about uncertainties of deal financing and I took that bet. Fortunately things worked out. It is time to redeploy capital to work on other opportunities.

CHC's Plan of Arrangement Approved by British Columbia Supreme Court

CHC's Plan of Arrangement Approved by British Columbia Supreme Court

I have bought CHC on the hopes of earning a return on the spread between the buyout price and the market price at the time, for more details see here. So far the probability of the buyout occurring is increasing for several reasons:

1. shareholders approval of 99%, my votes are included in the 99% somewhere,
2. granting of court and regulatory approvals,
3. credit issues are easing a bit to allow the already small financing portion from Morgan Stanly to fund the buyout.

Given these developments, I can put the buyout probability of occurring close to 99%, 1% for idiot factor.

However, opportunity cost for these type of strategies are key. These strategies are not worth pursuing in an up market and the market in April has recovered in a major way. So far the position is outperforming the market since I initiate it. But if the market continues to perform in May as it did in April, I will under perform. The good news is the buyout is scheduled to close in June at that time I will be able to allocate capital quickly before missing any other opportunities.

Performance of CHC vs major indexes:
CHC 5.12%
TSX 3.52%
S&P500 4.04%

CHC Buyout: an update

CHC has announced the date for their special shareholders meeting to approve the buyout by First Reserve Capital. They also filed their annual information document with SEDAR. The stock has has shot 3% in the span of two days.

The proxy did no disclose any new information, however it gave the breakdown of financing that will be used in the buyout. Initially First Reserve said it will finance the deal with a large portion of its equity but failed to give any details. In the proxy it disclosed that the debt portion will be $850 million out of $2.5 billion deal. I guess seeing the commitment by First Reserve alleviated a lot of concerns around uncertainties of the buyout exposure to the credit market trouble.

The deal is bending the following steps:

1. shareholders approval, which is almost a none issue,


2. regulatory approval, German officials gave their blessing others will follow suit, and


3. court approval will be given once shareholders approve the deal.

The stock price has closed towards the buyout price sans 4.11%. I expect to see the price inch closely towards that mark in the weeks to come.

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.

CHC Buyout Price Behaviour

I have invested in CHC Helicopter in hope to earn the spread between current price to the takeout price, read my analysis here. The price behavior is interesting so far. Although it has been increasing steadily from the buyout announcement, the rise in price is not as big as I expected.

I Have researched and researched any issues with the buyout there are none. The buyout have the following steps to complete:

1. regulatory approval from the EU, which the fund will satisfy.
   
2. shareholders approval, which is guaranteed by virtue of large ownership by CEO and a family trust.

However, it seems that as the equity markets sell off, the gap to the takeout price is increases, as seen in the graph above. It seems that investors will sell anything to meet their margin demands. there is the also added skepticism that financing is not going to be provided by banks. However as outlined part of this financing package is equity provided by First reserve.

CHC Buyout

I just want to write a quick update on my buyout investment. So far the stock is inching up slowly to the buyout price as we approached the closing date. This is very typical of a buyout stock. As soon as they announce regulatory approval from EU, which should be routine, CHC will move higher by a point or so closer to the transaction price.

There were more deals announced by private equity into the energy infrastructure space like this one. First reserve was busy buying storage terminals and pipelines all over the world. More private equity firms have joined the race to deploy their capital as well.

Energy infrastructure and service investment should earn better returns over the years than pure energy plays. Their services are needed more and more as oil gets harder to produce.

An interesting observation on CHC stock behaviour due to its listing on NYSE and the TSX. The NYSE listing has outperformed the TSX performance since the deal was announced by a small margin, adjusting for the exchange rate.

CHC on NYSE appreciated 4.41% while CHC on the TSX rose only 1.48%, while the Canadian Dollar appreciated by 2.89% since Feb 25. That leaves .04% of probably liquidity performance on the table. I guess the TSX is less liquid than the NYSE to explain the difference which should be identical in this situation.

CHC Helicopter Position Added

Today I added CHC helicopter to my portfolio at $30.42. I could not get at lower prices as quantities were disappearing fast and I had to enter my order at market rather than my preferred way of limit order.

The higher price will lower my annualized returns but it is still above the 20% threshold expected return that i need for this strategy. My maximum price that I would have paid for CHC to earn a satisfactory return was $20.5, so i go a bit under that which was good.

I will be adding a tight stop loss order as CHC should not drop significantly from the buyout price. If the price drops significantly it means there is a problem in the deal and I want out of the position with minimal losses.

I will keep you posted on the progress.

Value Idea: Buyout of CHC Helicopter

In a market like this where it is not expected to go anywhere, it makes sense to look for high probability small returns to boost the portfolio performance. In this case it is buying the shares of target companies in announced buyouts and mergers. This post about a case I will be buying in on Monday.

On Friday First Reserve Corp. announced the buyout of CHC Helicopter Corp., a firm specializes in oil field transportation. The deal is interesting and makes for a good case to invest in CHC to earn a quick expected return of 6%.

Here are the facts of the buyout:

• CHC transports people and equipment to oil and gas drilling locations, is the world’s largest provider of helicopter services for oil companies.
• U.S.-based private equity firm First Reserve Corp. has made a bid for Vancouver´s CHC Helicopter Corp. (TSX:FLY.A) valued at $3.7 billion.
• First Reserve is offering $32.68 a share, a 49 per cent premium to CHC´s closing price on the TSX Thursday of $21.88.
• The $3.7 billion includes a total cash component of $1.5 billion about $800 million in debt and about $1.4 billion in liability associated with off-balance-sheet aircraft leases.
• CHC´s headquarters would remain in Vancouver.
• Sylvain Allard will keep the CEO title, a job he has held since November 2004.
• Chairman Mark Dobbin, son of CHC founder Craig Dobbin, will not stay with the company after the deal closes.
• The deal is set to close in June, 2008.

I think this is a good buyout to earn a quick return on the gap between the buyout price and current market price for the following reasons:

• The deal size is just right about $2 Billion; it is not something huge that will scare the banks.
• A majority of the buyout is equity from First Reserve so the banks are in for a smaller stake and smaller exposure.
• This will get shareholder's approval 100% guaranteed as the needed majority of the shares are controlled by Mr. Dobbin.
• First Reserve is not just a run of the mill Private Equity firm, it specializes in energy companies and in recent times has been focusing on the service side of things. They are building a collection of businesses that will capitalize on the lack of spending on oil fields infrastructure in the last few decades. The company makes a very strategic addition to their portfolio as demand for helicopter transportation services have exploded with oil fields getting more remote. The firm speciality makes this buyout more likely to proceed.
• The company has great demand ahead of it and it is in the right business. It has no troubled areas to the economy.
• The deal is very simple buyout there are no multi partners or any intended breakup of the business that can complicate its funding.
• CHC is in relative good financial position from balance sheet perspective and has good profitability.
• The break up fees levied on First Reserves if it walks away is double those against the company and comes to about 6% of the company value. The structure projects confidence that First Reserve will close.

Now lets look at the numbers from a probabilistic point view. There are two possible future states: the deal goes through or falls apart. I am assigning 95% chance that the deal will go through due to the reasons I explained earlier. If you agree with that probability assignment then you can expect 6% return, including a dividend payment, for your trouble. The annualized expected return is 25% which exceeds the 20% threshold that risk arbitrage operations require. The details of the payoffs are illustrated in the table below.