Anticipated Closing in October for Varian Semiconductor Equipment Associates

It looks like everything is on track for an October closing with the acquisition of Varian Semiconductor Equipment Associates, Inc. (Ticker: VSEA) by Applied Materials, Inc. (Ticker: AMAT). Applied Materials made the following comments regarding the merger in yesterday’s earnings conference call. Here’s what they said:

“…Over the past 3 months, we've taken a number of important steps towards completing the Varian acquisition. On August 11, Varian shareholders voted to approve the merger, and to date, we have received regulatory clearance from Israel, Germany and Taiwan. We're still awaiting approvals from the U.S. and China. We're committed to closing the transaction, which we now expect to occur in October. We are excited about the opportunities that we will deliver to our customers, shareholders and employees by combining the strengths of these 2 companies.

Cash and investments ended the quarter at $6.8 billion, up $2.2 billion from the second quarter, including the debt proceeds. The elevated level of cash is reflective of our all-cash offer for Varian. We regularly review our capital structure, relative to our capital allocation principles of ensuring a strong investment-grade balance sheet that allows us to fund disciplined investments in the growth of our business while supporting dividend growth, in line with business performance, and use of share repurchase as the preferred means of returning excess cash to shareholders….”

They just need the regulatory OK from U.S. & China and have the cash on hand to pay for the deal. I’m tempted to add to this position as the annualized return is still attractive.

Some RPC Inc

We just had a small tremor here in the northeast. I thought my coworker was shaking the cube and was getting annoyed when I finally realized it was an earthquake. I like this reaction from traders on the NYSE: “Shortly after the quake struck, traders in the New York Stock Exchange also felt the quake and shouted to each other, "Keep trading!" CNN's business correspondent Alison Kosik reported from the floor at 2:20 p.m. E.T.” Money does not stop…

I was trading in and out of RPC Inc (Ticker: RES) these past few days. I’m going to hang on my position that I bought at $22.12. This company specializes in “fracking”, which is a process used to extract natural gas from shale formation. This is a cyclical company, but currently has a nice back log. The company has also exploring the possibility of selling itself and has hired Goldman Sachs to explore this option. I like this risk reward opportunity.

Back In Kinetic Concepts and Some Pharmaceutical Product Development

I’ve jumped back into Kinetic Concepts (Ticker: KCI) today at an average price of $68.05. As you may know, this company has agreed to be acquired by Apax Partners for ~ $5 billion or $68.50 in cash. Today, Bloomberg reported that Bain Capital and Avista Capital Partners are trying to put an offer together that tops Apax Partners. We’ll likely hear soon if we get a higher offer as Kinetic Concept’s “go shop” period expires next week. The big question for Bain and Avista is obtaining favorable debt financing, which I think is doable.

I also picked up some Pharmaceutical Product Development, Inc. (Ticker: PPDI) at $32.50. This company has announced that it is exploring strategic alternatives. Bloomberg reported that the Carlyle Group is in exclusive negotiations with the company.

In terms of my other risk arb plays, I’m still holding China Fire and Security Group, Inc. (Ticker: CFSG) and Varian Semiconductor Equipment Associates, Inc. (Ticker: VSEA). I expect both of these will close by early to mid Q4.

Sold Blackboard

I sold my Blackboard (Ticker: BBBB) position this morning at $42.59 generating a gain of 0.40% over a two day period. This was basically a break even trade. I wanted to raise some cash for some potential opportunities. It's probably a bit too soon to do any serious buying. There's a lot of technical damage out there and will take some time to repair. Patience is key right now...

Some Blackboard

Ouch… What just happened??? You don’t want to be catching a falling knife on a day like this. I was focusing on some risk arb opportunities. I picked up some Blackboard (Ticker: BBBB) today at $42.42. This company has already agreed to be acquired by Providence Equity Partners for $45 in cash. This is a ~ 6% return (~ 20% annualized return assuming a mid November closing). The probability of this deal falling apart is small. The stock simply sold off because people needed liquidity. Institutions just sold blindly. Not a very efficient market with many of the deal stocks today.

Varian Semiconductor Equipment Associates (risk arb play)

I thought I would take a break from the risk arb plays after the closing of L-1 Identity Solutions since there wasn’t much going on. I did some screens and Varian Semiconductor Equipment Associates Inc. (Ticker: VSEA) popped up. They are being acquired by Applied Materials (Ticker: AMAT) for $63 in cash. The deal was announced on May 4th and is currently awaiting regulatory approval from several countries (still waiting decisions from US, China and South Korea). I picked up a few shares yesterday at $60.93 and looking for this deal to close at the end of September (3.4% return, which equates to an annualized gain of ~ 20%). The spread has started to widen a bit due to some perceived risk. I don’t see any major regulatory hurdles with this deal. From what I’ve read, there is a small overlap in some high-end ion equipment between these two companies, but this overlap is tiny and is not big enough to block the deal. The timing in the closing of the deal will be based on the decision from MOFCOM (China’s Ministry of Commerce). I’ve seen analysts factor in a 5-month review by MOFCOM. There is also a second request for additional info from the US DOJ. Just something to keep an eye on…