Anyone who buys Grubhub (NYSE:GRUB) stock now should be aware that the company agreed to an all-stock merger. Just Eat Takeaway (AMS:TKWY), a Dutch company, signed an all-stock deal to buy all the shares of Grubhub in a specified ratio.
The deal hasn’t closed yet. So, in effect, buying Grubhub shares now is a merger arbitrage play. This article will help you calculate the math involved in the merger arbitrage.
This article will help you decide whether to hold on to the stock if you already own it. And if you don’t own it, you can see if the math and probabilities involved make it a worthwhile investment as a speculative merger arbitrage play.
The Merger Math Basics for Grubhub Stock
There are three main things you need to know. First, how many shares in Just Eat Takeaway do you receive for every Grubhub share?
Second, what price does the TKWY stock trade for in Europe? And third, what is the currency exchange rate?
Just as you suspect, the answer to these three questions implies that the actual price Grubhub shareholders will receive will vary each day. That brings in uncertainty. And it also provides an opportunity for merger arb investors.
First, the merger formula is as follows: every Grubhub share will receive just 0.671 shares of Just Eat Takeaway.
Second, Just Eat Takeaway trades on the Amsterdam and London stock exchanges. You can find their prices by going to Bloomberg and type in the symbol TKWY:NA for the Amsterdam Exchange price. The NA after the colon stands for Netherlands Amsterdam. You can also type in JET:LN for the London Stock Exchange price for the company.
Third, we need to know the exchange rates. For example, the European price for TKWY:NA is 98.98 euros. This is the price as of July 7.
The London price is 8,698 on July 7. This is the price in pence as all stocks in the U.K. are priced. So that means it is 86.98 U.K. pounds sterling. So, we need the price of euros in U.S. dollars and the price of U.K. pounds in U.S. dollars. You can find the exchange rates with internet searches for the following two phrases: EUR:USD and GBP:USD.
Calculating the Merger Arb Math
Here is how you calculate whether the investment is worthwhile. First, you multiply all the three inputs we found above by each other.
For example, to get the equivalent U.S. merger price for the European shares you multiply 0.6710 by 98.68 and then multiply that number by the exchange rate, which is $1.13. That means you multiply 66.21428 (i.e., .6710 x 98.68) by 1.13. This yields a U.S. price of $74.82.
For the London equivalent price, you multiply 0.6710 by 86.98 and then multiply that result by 1.26. That yields a U.S. dollar price of $73.54 per share.
So, the merger price is equal to $74.82 in Amsterdam and a lower price of $73.54. That is not uncommon in these situations and has to do with larger institutional merger trades between the two countries and their exchange rates.
Next, we compare this with the U.S dollar price of Grubhub today and calculate the expected return. At the time of this writing, Grubhub stock was at $71.08. This implies that the Amsterdam arbitrage will earn $3.74 per share and the London arbitrage will earn a lower $2.47 per share.
Estimating the Arbitrage Return for Grubhub Stock
Most investors will not actually be able to get these exact prices. The exchange rate will always be worse than what is quoted depending on the size of your arbitrage. The bid-ask spreads on the stock buy and simultaneous short sale will also be different.
For all intents and purposes, therefore, most arbitrage investors will just buy Grubhub stock and treat the investment as a cash alternative. For example, assuming the deal takes three to six months to close, buying Grubhub will yield a minimum of 3.47%.
This is if you sell the Just Eat Takeaway shares you receive and sell them in London in three to six months. In other words, the profit of $2.47 divided by $71.08 cost is 3.48%. It also assumes the prices stay the same.
The same calculation, assuming the Amsterdam stock price and the euro rate stays the same, is 5.26%. That is derived by dividing $3.74 by $71.08.
The estimated return is 3.48% to 5.26%. If the deal takes three months to close, that is an annualized ROI range of 13.9% to 21%. I don’t believe in compounding those numbers. It is very difficult to find these deals and reinvest the returns in time so that they compound.
On the other hand, if the deal takes six months to close from now, your purchase of Grubhub stock will have an ROI of 6.96% to 10.5%.
What to do With Grubhub Stock
If you either own Grubhub stock now or are contemplating buying it, your upside is limited. The most you can make, assuming prices don’t change is between 3.5% and 5.25%.
Is that worth waiting for the deal the close? It is if you are a merger arb investor, and you believe the deal will close in three months. You might even be willing to short the Takeaway stock assuming you will receive the shares in three months. I don’t recommend doing that though.
The bottom line is this. The expected return on Grubhub stock over the next three to six months will vary. Assuming no major changes to the deal, the ROI will be better than holding cash but also lower than you might make elsewhere.