From this week's Barron's:
>>Barron's Online -- July 26, 1999
Trading Points
Telecom Deals Come Calling, But Arbs Don't Answer; What's
Up With an Internet Junk Bond Offering?
By JACQUELINE DOHERTY
It seems that the price of risk hasn't quite returned to normal in the world of arbitrage. Stocks
of companies that are the targets of announced acquisitions are trading well below what they'd be
worth if the deal closes. The key word, of course, is if. For various snafus can always block the
transactions, adding a risk that's hard to judge.
Part of the problem is that there are still too many deals and too few arbs around to cause the
spreads to narrow. Some believe it's because too few players returned after last year's disastrous
results and the near-blowup of Long Term Capital Management. Others note that arb players have made
a lot of money in recent months and may be waiting on the sidelines until deals are nearer to
closing to reduce their risk.
That being said, we thought we'd take a look at Global Crossing's acquisition of Frontier. The deal
could close as soon as late September if regulators bless it. Global Crossing, an upstart operator
of undersea fiberoptic cable, will spend $11.1 billion to buy Frontier, creating a telecom company
with 77,000 miles of fiber, $4 billion in revenue and a presence in 160 cities and 19 countries.
Normally arbitrageurs would step into the breach and buy Frontier shares and short Global Crossing
shares. But it seems that it's hard to borrow Global Crossing shares, so arbs have had trouble
building short positions. As a result, they're staying away from the deal, which may spell
opportunity. As long as Global Crossing's shares stay between $34.56 and $55.78 a share, then a
Frontier shareholder will get $63 worth of Global Crossing's shares.
Right now, Global Crossing's shares trade around $41, well within the band, yet Frontier's shares
trade at $55. That means Frontier's share price should jump sharply before the deal gets done.<<
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[end of FRO relevant excerpt] |
