Back in Late February 2010, L.B. Foster Co. (FSTR) announced it will acquire Portec Rail Products Inc. (PRPX) for $11.71 per share in an all cash tender offer. Click here to read the 8-K on Yahoo! Finance. Originally, the deal was supposed to be completed before the second quarter of 2010 but recently the anti-trust division of the U.S. Department of Justice requested additional information from both companies. L.B. Foster Co. (FSTR) also entered into an agreement with the U.S. Department of Justice in which L.B. Foster Co. (FSTR) will not complete its acquisition of Portec Rail Products (PRPX) before July 16, 2010. This has also pushed back the “drop-dead date” to complete the acquisition to August 31, 2010.
A interesting piece of good news out of this delayed acquisition is L.B. Foster Co. (FSTR) has allowed Portec Rail Products (PRPX) to open talks with Ameridan Resources LLC again. Before L.B. Foster Co. (FSTR) won in its bid to buy Portec Rail Products, Ameridan Resources LLC had offered $12 per share for Portec Rail Products (PRPX). It is possible that Ameridan Resources LLC will reinstate its bid of $12 per share or maybe even increase its bid. However, this is something we can’t really plan for so we need to look at this deal with L.B Foster Co. (FSTR) completing its acquisition of Portec Rail Products (PRPX) for $11.71 per share in cash.
Portec Rail Products (PRPX) is currently trading at $11.55 per share; it is up 1.76% today. When I was putting together my notes for this post Portect Rail Products (PRPX) still had a little more than 3% to reach the tender offer price of $11.71. Today’s move has erased about half the potential gains for this deal but it still offers a decent range of annualized returns for an all cash tender offer.
Commissions are excluded in the scenarios below but commissions will need to be accounted for to make sure the merger arbitrage makes sense and money.
Best Case:
- U.S. DOJ approves the acquisition
- L. B. Foster Co. (FSTR) completes the acquisition on July 16, 2010
- Receive $11.71 in cash per share
- Receive PRPX dividend of $0.06 per share in June 2010
- Potential 1.90% in total return
- Potential 13.12% annualized return
Average Case:
- U.S. DOJ approves the acquisition
- L. B. Foster Co. (FSTR) completes the acquisition on August 31, 2010
- Receive $11.71 in cash per share
- Receive PRPX dividend of $0.06 per share in June 2010
- Potential 1.90% in total return
- Potential 6.54% annualized return
Worst Case:
- U.S. DOJ blocks the acquisition
- Portec Rail Products (PRPX) plunges in price to pre-buyout levels
Surprise Case:
- Ameridan Resources LLC initiates a bidding war and out bids L. B. Foster (FSTR) with $12 per share
Any merger arbitrage deal is never without risk and the risk in this deal is the anti-trust division of the U.S. Department of Justice blocking the acquisition. Even though the U.S. DOJ requested more information about the acquisition I don’t see how two small companies with market caps of $280 million for L.B. Foster Co. (FSTR) and $110 million for Portec Rail products (PRPX) can constitute a potential monopoly but stranger things have happened.
Related posts:
