Equity Arbitrage Opportunities

Why do Indian listed MNCs trade at such a high P/E compared to their global parents? Look at this table. HUL trades at 52× earnings in India. Its parent Unilever trades at just 20× in London. Nestle India? 70× here, 18× in Switzerland. Linde India? 125× here, 32× globally. This gap is called Valuation Arbitrage - when the same business (or very similar) is valued much higher in one market than another. Why does this happen? 1️⃣ Scarcity premium In India, there are very few listed high-quality consumer and MNC stocks. When demand is high and supply is limited, prices get bid up. 2️⃣ Growth expectations The India arm often grows much faster than the global business. Even if both sell soaps or noodles, India’s market penetration and consumption story is still expanding. 3️⃣ Brand & moat These subsidiaries usually dominate their categories here with strong pricing power, distribution, and loyalty. 4️⃣ High ROCE, low debt Most Indian MNC arms have clean balance sheets and strong cash flows - the kind of companies investors love to hold for decades. 5️⃣ Different investor base Indian equity markets are driven by domestic mutual funds and retail investors willing to pay a premium for “quality at any price.” But… High P/E doesn’t always mean overvalued - if earnings grow fast enough, it can be justified. However, if growth slows while valuations stay sky-high, returns can disappoint. In short: The same parent company may look “cheap” abroad and “expensive” here - but that’s because the market sees a different growth runway, risk profile, and demand-supply balance. Sometimes, valuation gaps are an opportunity. Sometimes, they’re a warning. The trick is knowing which is which.

SPAC arbitrage is back. This morning, Cantor Equity Partners (CEP) announced a merger with bitcoin treasury company Twenty One Capital in a $3.6 billion merger. The SPAC shares rallied 65% from their cash value of $10.60 to close at $16.50 per share, demonstrating the tremendous upside optionality inherent to SPAC arbitrage. SPACs are the most misunderstood security in the market today. Fundamentally, they represent the return of a T-bill (taxed as capital gains, not interest income) plus a free equity call option. This equity call option was extremely valuable in 2020 and early 2021, as many SPACs "popped" 50% or more upon their merger announcements. This "free" upside exposure, combined with its inherent downside protection via its redemption option, makes SPAC arbitrage perhaps the most attractive risk-adjusted return available in the market. While the blank check industry has been fairly quiet since 2021, it has been making quite the comeback this year, with 24 new SPAC IPOs raising $4.4 billion year-to-date. The market is now warming to SPAC mergers. The CEP / Twenty One Capital provides an "early warning" to allocators that perhaps SPAC arbitrage is making a comeback. The SPAC market is still dramatically underowned, with multistrategy hedge funds and generalist investors leaving the asset class en masse in 2021, leaving pure risk arbitrageurs to own the market. Accordingly, while this attractive upside optionality has just re-emerged, the vast majority of allocators are not yet allocated to the strategy, and IPO allocations are still quite easy to get full fills (for now). Equity upside + T-bill downside is a powerful combination. Allocators should take note of the sea change that just occurred. Disclosure: Long CEP in the Accelerate Arbitrage Fund (TSX: ARB)

M&A isn’t just an opportunity for the target or buyer. For publicly traded companies, M&A announcements also bring profit-making opportunities for investors. Investment strategies are designed around the probability of a successful deal. 👉 Merger Arbitrage Merger arbitrage is a strategy where investors buy a target company's stock after an M&A announcement. The goal is to profit from the difference between the current market price and deal price. Say Company A announces it will acquire Company B at a share price of $25. Assume Company B, at the time of announcement, is trading at $20/share. If the market is 100% sure the deal will occur, the concept of efficient markets dictates that the share should trade at $25 right after the announcement. However, there are risks involved in every deal. This arbitrage spread occurs between the announcement and the merger's completion periods. The target company's stock usually trades at a discount after a merger announcement - presenting an arbitrage opportunity. Gradually, the price will convert to the offer price set by the acquirer once the completion risk diminishes. Several studies have indicated excess positive returns with this investment strategy. However, there are also signs of returns decreasing over time as markets become more efficient. Some factors that determine the successful completion of a deal: - Does the buyer lack credibility? - Does the financing source lack credibility? - Is the deal non-definitive? - Is the regulatory risk too great? - Is there a buy-side vote? Arbitrage strategies are usually carried out by sophisticated investors, i.e., financial institutions. Have you ever successfully pulled off a merger arbitrage? Share your experience 👇 . . . 𝙄𝙣𝙩𝙚𝙧𝙚𝙨𝙩𝙚𝙙 𝙞𝙣 𝙢𝙤𝙧𝙚 𝙈&𝘼-𝙧𝙚𝙡𝙖𝙩𝙚𝙙 𝙘𝙤𝙣𝙩𝙚𝙣𝙩? 𝙈𝙖𝙠𝙚 𝙨𝙪𝙧𝙚 𝙩𝙤 𝙛𝙤𝙡𝙡𝙤𝙬 𝙢𝙚. #entrepreneurship #venturecapital #startup #mergers #acquisitions Serial Entrepreneur & Investor Helping Startups Become Unstoppable – David Hauser