Low capital cost and strong economic growth have created a perfect storm for stock mergers and acquisitions in recent years. The majority of the time, news of bought-out stocks will send share prices soaring immediately, but sometimes they’re not the best stocks to buy.Typically, a buyer makes a bid for a target at a significant premium to current market price in order to entice management and shareholders to accept the offer. In the first three quarters of 2016, the average buyout premium was between 30% to 35% higher than market price.
Any stock investor would love to see his or her shares jump 30%-plus overnight. However, the buyout process isn’t always so neat and tidy.
Sometimes, buyout offers raise regulatory antitrust concerns. Other times, shareholders of the bidding company may not be as enthusiastic of the proposed deal as the target company is. In these cases, the target company’s stock will trade at a discount to the buyout price until the deal is officially complete.
Risk arbitrage traders find opportunities in these situations, and there are plenty of them out there today. Here are three bought-out stocks to buy due to their significant upsides.
Bought-Out Stocks to Buy: Time Warner Inc (TWX)
Time Warner Inc (NYSE:TWX) and AT&T Inc. (NYSE:T) made headlines in October when AT&T announced a massive $85 billion buyout of TWX. Time Warner stock certainly spiked following the news, but it’s not trading anywhere near its $110 buyout price. In fact, at right around $88.50, there is 24.2% upside to TWX stock, assuming the deal goes through.
Why is the market so skeptical? U.S. regulators haven’t been so kind to mega media mergers in recent years. The Department of Justice blocked a merger between Time Warner Cable and Comcast Corporation (NASDAQ:CMCSA) in 2014 due to antitrust concerns.
AT&T CEO Randall Stephenson argues that the TWX buyout is vertical integration, meaning it would not reduce competition in any single market. However, those protesting the deal point out that AT&T raised its broadband prices less than five months after its buyout of DirecTV in 2015.
Still, Stephenson makes a very good point that regulators have never blocked a vertical media merger in the past. That fact makes Time Warner one of the top bought-out stocks with the most upside in today’s market.
Bought-Out Stocks to Buy: Rite Aid Corporation (RAD)
Walgreens Boots Alliance Inc (NASDAQ:WBA) announced a deal to buy Rite Aid Corporation (NYSE:RAD) for $9.4 billion way back in October 2015. That buyout price implies RAD could be worth $9 per share, yet the stock is trading at only $6.50 per share. At that price, there is an incredible 38.4% potential upside to RAD stock.
Not surprisingly, antitrust issues are the primary concern for the market. And these concerns aren’t pure speculation. In December 2015, the Federal Trade Commission requested more information from the companies about the details of the deal. Nearly a year later, the FTC has yet to make a ruling on the merger.
However, the most recent quarterly report by WBA indicates that management is confident the deal will close. In fact, WBA even included projected 2017 Rite Aid earnings on its own financial report. CEO Stefano Pessina even said he is confident of the deal and expects it to close in Q1 of 2017.
With Q1 just a couple of months away, RAD stock could jump nearly 40% in a matter of weeks. If Pessina is correct Rite Aid is one of the most valuable bought-out stocks in the market.
Bought-Out Stocks to Buy: The Valspar Corp (VAL)
Another one of the current bought-out stocks that falls into the “it’s complicated” category is The Valspar Corp (NYSE:VAL). Sherwin-Williams Co (NYSE:SHW) has agreed to a $9.3 billion buyout of VAL and is offering a price of $113 per share. However, SHW and Valspar currently hold a combined 44% share of the paint market, which understandably has raised concerns among regulators and investors.
The two companies anticipated the concerns when they structured the deal and plan to divest a significant amount of assets to gain regulatory approval. The buyout agreement stipulates a price of $113 per VAL share if Valspar is forced to divest assets representing up to $650 million of its 2015 revenue.
If the companies are forced to divest assets worth $650 million to $1.5 billion in revenue, the offer price drops to $105 per VAL share. If regulators force the companies to divest even more assets, SHW has the right to call off the deal entirely.
Valspar stock recently dropped 5% following a report by the New York Post that regulators are pushing the companies for more divestment than they originally proposed.
In response to the report, the two companies issued a joint press release assuring investors they expect the deal will close by the end of Q1 2017. If it does, VAL stock investors have about 13.5% upside for the $113 version of the deal and 5.5% upside for the $105 version.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.