Although such arbitrage funds have been active in the United States and Europe for more than a decade, Bancorp believes this to be the first New Zealand dollar dedicated merger arbitrage fund in New Zealand.
Bancorp’s managing director Craig Brownie said that the fund offered New Zealand investors a great opportunity to capture some of the profits that can be made during takeover activity.
"Until now it has been the large overseas arbitrage funds that have netted these returns," he says.
"The concept is relatively simple. We will be investing in publicly announced corporate activity situations, such as takeovers, with the primary focus being the New Zealand and Australian markets.
"When an offer is announced there will typically be a spread between the offer price and the market price, reflecting the risk of the transaction failing and the time until transaction closure.
"On average you can expect a takeover situation to last around four months with an initial price discount to the offer price of say around 5%. Annualised, that equates to a 15% return. Based on our analysis and the current level of corporate activity, we expect gross returns in and around this level to be achievable.
"Greater returns can be made if the offer price is increased or the takeover becomes contested. Recent examples of this were the takeover of Montana Wines by Allied Domecq, which was hotly contested by Lion Nathan and, more recently, the takeover of Owens Group by Mainfreight, which had to raise its initial price to get traction.
"Recent takeover history in New Zealand shows that three out of four takeovers have resulted in a subsequent higher price.
Brownie warns not all takeovers that are announced come off.
"We will use our considerable experience of M&A transactions to analyse the attributes of each prospect and create a portfolio of superior returning arbitrage opportunities."
Corporate activity in New Zealand and Australia had increased significantly in recent
years.
According to the latest data by Thomson Financial M&A activity increased by 105% in New Zealand and 66% in Australia in the 2003 calendar year.
"We are not saying we will be involved in every transaction but it does offer our fund considerable scope. From a timing point of view it couldn’t be better," Brownie said.
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