Jazz Technologies Merger Arbitrage


(This article originally appeared on The DIV-Net)

Jazz Technologies (JAZ) announced on May 19, 2008 that they are being acquired by Tower Semiconductor (TSEM). The final decision of the deal is expected to be announced dependent on the results of the special meeting of shareholders scheduled for September 17, 2008. When I started to look into this merger yesterday, the spread was at 15%. Today, August 13, the spread fluctuates between 6-9%. However, this still comes out to an annualized gain in the range of 40-72%.

Basics Of The Merger

  • If the deal goes through, each share of JAZ will be converted to 1.8 shares of TSEM.
  • Fractional shares will be paid in cash
  • JAZ options, vested or unvested, will be exercisable for 1.8x Tower ordinary shares.
  • All approvals received and the only hurdle left is shareholder approval by Jazz shareholders.
  • For more background on the merger and both companies, you can view a presentation by going here.

Termination Details

The termination conditions for this merger allow both parties to walk away fairly easily without much pain. The usual clauses pertaining to delays, failure to recommend the merger, failure to meet legal requirements etc are in there for good measure but the point that caught my attention is that the “Jazz has agreed to pay Tower a termination fee of $1.2 million and reimburse Tower for up to $1 million in expenses incurred in connection with the transaction…”

With this type of exit path, Jazz probably wouldn’t feel any burden or impact if it did decide to cancel the merger. However, the chances of this happening at this stage is very low.

Ever since Jazz went public with an IPO price of $6, their stock price has been falling. Therefore a 120% premium offer at the time of the merger is a definite welcome, one which the company and shareholders would gladly accept.

The merger also restricts Jazz from soliciting other transactions which means that it has to be Tower. Take it or leave it.

Approvals

The acquiring company, Tower Semiconductors, is an Israeli company and so the approval process is slightly different.

Tower’s submission of form F-4 has been declared effective by the SEC, clearing the way for Jazz shareholder approval. Tower does not require approval by its own shareholders.

Additionally, Tower must receive the following approvals in Israel.

  1. approval of the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor; (received June 3)
  2. approval of the Israeli Investment Center of the Israeli Ministry of Industry, Trade and Labor; (submitted)
  3. approval of the Israel Lands Administration; and
  4. approval of the Tel-Aviv Stock Exchange (listing of additional shares) (to be submitted at or around date of closing)

As it stands, all important milestones have been achieved in the merger process except the Jazz shareholder approval but this doesn’t really worry me because as I stated above, it would be crazy for shareholders to go against the merger.

While insiders also own roughly 20% of common stock, there are two companies that own about 31% and 29%. I can’t say for sure that it will be a unanimous vote, but insiders holding 20% is a large amount and one which could positively affect the outcome.

Completion Details

Since each share of Jazz is converted to 1.8 shares of Tower, the final closing price depends on Tower’s share price. Looking at Tower’s price, it isn’t doing very well either and is continually falling. There is a high likelihood that it could erode the spread completely.

So far this is how I see the merger. I also outlined a process I learnt and follow here.

  1. Due diligence by both parties – Yes
  2. Financing and regulator approval – Yes. No financing involved since shares are converted to 1.8x Towers. However, Tower is currently in “negotiation of a restructuring arrangement of its long-term debt with its lender banks, Bank Leumi and Bank Hapoalim, and one of its major shareholders, Israel Corporation Ltd. The restructuring will include a substantial reduction in the level of the Company’s debt to its banks and Israel Corporation, deferrals of remaining principal and interest, and a waiver from compliance with financial covenants for an extended period of time.” – D&R News
  3. Get preliminary shareholder sentiment (or controlling shareholder approval) – N/A
  4. Obtain regulator (SEC, FCC, any and all) approval – Yes
  5. Get final shareholder approval at a meeting called for that purpose – TBD

Risks

The risks I see are as follows:

  • Tower shares are thinly traded so even if the merger is successful, it may be difficult to sell.
  • If Tower share price continues to fall, a loss could be incurred
  • Tower is not a company I want to hold onto. No moat company in a bad industry.
  • Merger could be canceled. (low chance)
  • May not pass shareholders

Conclusion

From the information I have gathered, the merger is likely to go through. However, what is important is the price of Tower on the date of closing. If it declines at its current rate, this merger may not be worth it if the entry price is any higher than what it is now.

The merger is very low profile without much information being given out by either party. Jazz made it clear in their latest conference call that they would not answer any detailed questions related to the merger itself.

In terms of probability, I see the merger has a greater probability of closing than failing.

Disclaimer

No positions in JAZ at this time but I am considering.

[tags]arbitrage, jaz, merger, tsem, special situation[/tags]

  • Jae,

    Why don’t you just short Tower? If you short 1.8 shares of Tower for every share of JAZ that you own, then when you recieve the shares of Tower you merely use them to cover the short.

    So say you’d own 300 shares of JAZ, at a cost of 1.10. So that’s $330. Then you short 1.8 shares of TSEM at .73/share for every share of JAZ you own, so that’s 540 shares, or $394 being deposited into your account. Your JAZ shares are converted into 540 TSEM shares, and you cover your short. You now own no shares, and your profit is the difference between the $394 you received and the $330 you paid, or $64, a 19% return.

    The only issue I might see here is getting the borrow on such a small stock.

  • Upon looking, the bid/ask spreads are so wide that this would be tough. My broker won’t even allow a limit order under a buck, so shorting TSEM would be asking for disaster, not knowing what price I’d get the borrow at is suicide. Looks like taking the risk of a TSEM price drop is needed.

  • Shorting TSEM while owning JAZ is theoretically how risk arbitrages are played, but I can’t short.

    I only trade stocks from my 401k account which doesn’t allow any shorting or options.

    It’s only the old school Long for me.

  • Don’t worry Jae. It isn’t even realistic to make the short right now if you had the ability. The bid/ask is too large and the stock too illiquid. Maybe if I had more money and a better broker! heh.

  • I’ve decided to pass on this one. Reasons being, I won’t be in town or near a computer to keep up to date and to sell out, and the illiquid state of TSEM doesn’t comfort me.

    I’m looking at PSD which is local and a cash transaction so it would work out better for me if it goes through.

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