Update: Puget Energy (PSD) Arbitrage

I wasn’t planning to write an update on the PSD arbitrage but a reader asked for my opinion on how I currently see the PSD merger so I’ll share it with everyone else and try to provide additional information.

Reminder Points

If the deal is approved, each share of PSD will be converted to $30 cash.

The deal is being financed by a “consortium of long-term infrastructure investors led by Macquarie Infrastructure Partners, the Canada Pension Plan Investment Board and British Columbia Investment Management Corporation and also includes Alberta Investment Management, Macquarie-FSS Infrastructure Trust and Macquarie Capital Group (collectively, the Consortium).”

All approvals have been received and the only process remaining is for reply briefs to be submitted by Oct 23 so that the UTC can review it and make a decision.

Price as of this writing is around $22.40 with a spread of just under 33% with about 1 week remaining which is an annualized profit of 1488%! (since I was wrong about the timeline of 1 week, I cannot give the accurate %)

Along with every other company out there, Puget Energy was thrown out during the market meltdown.

Odds of the Merger

I’m going to do something very similar to what Sivaram from Can Turtles Fly has already done.

Upside Potential: 33%

Downside Potential: 10%

Probability of Success: > 90%

Probability of Failure: <10%

Time Frame: 1 week > 1week but < 1 month

From the odds that I’ve applied to the situation, this could be highly profitable.

Additional Details of the Merger

Back in July 23, PSD filed a multiparty stipulation involving Puget Holdings, Puget Sound Energy, Staff of the Washington Utilities and Transportation Commission, Industrial Customers of Northwest Utilities, Northwest Industrial Gas Users, The Energy Project, NW Energy Coalition, and The Kroger Company. A month later, on August 25, all but one of the issues have been agreed upon.

However, reading the appendix from the exhibits, it is clear to me that this one issue should not prevent or upset the merger. All parties, including the UTC staff, have basically given the Ok for the merger to be approved. Even though PSD has a lot to agree upon in the stipulation, I don’t see anything outrageous.

On Oct 9, a filing made by PSD reveals that capital has been committed and ALL approvals have been obtained. All that remains is a review of the reply briefs if they are submitted by Oct 23. This leaves 1 week for an announcement by the UTC.

Insiders have also been vesting their options without any of them selling of exercising. It’s always important to see how insiders view the merger and interviews and actions of insiders confirm that the merger is a high priority in 2008 and they all want to see it go through.


At this point, I only see that truly unpredictable occurrences, which the company has no control over, is the only thing that can upset the deal.

Completion Checklist

  1. Due diligence by both parties – Yes
  2. Financing and regulator approval – Yes
  3. Get preliminary shareholder sentiment (or controlling shareholder approval) – Yes
  4. Obtain regulator (SEC, FCC, any and all) approval – Yes
  5. Get final shareholder approval at a meeting called for that purpose – Yes
  6. Insiders continually vesting or buying shares – Yes


The market being what it is, irrationality has allowed the price to drop from the mid $27 to the mid $22 which is actually below pre-merger announcements. Even if by freak of nature the deal is canceled, the company offers a dividend yield of 4.5%. Not to mention that this is a reliable utility especially in times of a recession.

I don’t believe I’ve ever seen such an advantageous arbitrage opportunity as this one.


Entered into a 1/2 position at $22.50 and looking to add the remaining half between the range of $21.6 – $22.50.

[tags] arbitrage, psd, Special Situation,merger,utc[/tags]

  • Great Blog post. I am going to bookmark and read more often. I love the Blog template

  • Jae,

    What are the odds that the consortium would decrease the tender price citing the deterioration of current financial markets?

    I sometimes watch CNBC World in the evenings and some news that caught my attention were constant reminders from the anchors about Macquiarie’s massive drop in the share price. If that’s the same Macquiarie as the one you are referring to, wouldnt’ that have an effect on the arbitrage?

  • You might want to take a look at this report currently being offered free of charge from The M&A Researcher.


  • @DGI
    Im thinking that if capital was a problem, the offer would have been lowered much earlier. As the deal was announced on last October, a new offer at this point in time is unlikely. The merger is also by Australia-Canada, so Macquarie won’t be supplying 100% of the capital.

    Thanks for this info but I don’t understand the following sentence.

    “The UTC has still not issued a formal decision date and it is unclear at this time if it intends to do for this case. Nevertheless, with the reply brief deadline established, UTC approval is now anticipated in a mid/late-November time frame.”

    I never got the impression that the UTC was on the fence. Also, I would be interested to know where I can get the info that states the mid/late Nov announcement.

    Glad you like the content and the layout 🙂

  • Jae,

    I thought the same but I wanted to get my concerns through you anyways. I am still fearful as I still remember several deals failing in the summer and early fall of 2007 just when the credit crisis was beginning to worsen.. The arbitrageurs lost their shirts at the time..

  • DGI,

    Very true which is why I try to enter into an arbitrage once it is close to completion. Although I’m confident that this one would go through, I will still be anxious until the official announcement is made.

    Thanks for the reminder.

  • Dom


    Thanks for the write-up. A question for you: your article implies that the merger will go through in one week’s time as that’s the deadline for the reply brief submission.

    However, I think UTC will also need some time to review the submission… and thus the rational for the mid/late-Nov time frame mentioned in Steve’s link.

  • Dom,

    I think you’re right. They probably would need extra time. So the time frame would be about 3 weeks I guess.

  • Very nice read and great insight!

    Best Wishes,

  • Ra’uf

    There seems to be a grass roots movement to form a PUD. It does not seem like this is a done deal by any means. Am I missing something? http://www.goskagit.com/home/article/public_power_for_skagit_county_pros_and_cons/

  • Ra’uf,

    Thanks for the link. I read something similar but of less detail this morning from this article.

    After reading this article, my views on how this will affect the merger doesn’t change. Here are my thoughts.

    The opposing counties are Skagit, Island and Jefferson. If you are not a resident of Washington state, these are the rural counties. This means less and lower paid jobs and a much smaller population.

    If this proposition was to go forward, I’m uncertain as to how they will come up with $1 billion just to acquire the infrastructure alone. I don’t even know how much more it would cost to get it running. For all this to happen it’s probably going to come down to higher taxes from these people and increasing taxes is the last thing anyone wants in this economy.

    Also, the worst case scenario of the PUD taking over would mean that PSE sell the infrastructure and lose customers in those counties. I don’t believe it would derail the deal, but it is a possibility. And if the proposition is passed, that would mean the rates would be regulated just like PSE. Washington state is a highly regulated state so nothing gets passed easily, but so far PSE has agreed to continue offering the same level of service even under new control. The UTC has also acknowledged that PSE meets the “no harm” requirement.

    As a previous customer of PSE, I must admit that the rates were higher than what I wanted to pay, but the service is excellent. You just can’t beat them here. And a lot of people know this.

    Lastly, looking at who paid the campaign bills for the Skagit PUD, it seems like of the $15,267.75 raised, only $1,450 was from cash donations. If this was such a big issue as the article implies, I would think more people would have donated. Even if each person donated $10, that’s only 140 people actively opposing it. Not enough to be a deal breaker.

    Thanks a lot for helping with the additional research.

  • Ra’uf

    Thanks for the well thought out update. At $21.57 this seems like a screaming deal.

  • With prices at $20.46 and 8% down from my purchase price, just have to remind myself that the price is just a tool and not a guide.

    I’m fully vested in PSD at the moment, but if nothing comes up, I’ll either add a little more or wait it out. On the other hand, if news is bad, I’ve got to be ready to cut losses and work on the next opportunity.

    I know some readers have bought PSD and are either scared or want to get in but feel uneasy. If this is the case, you would be best served to stay away and go long on great companies such as KO that offer stability and reliability. It’s much better to sleep comfortably at night.

  • Even though the price has risen to the $24 level, this company still looks like a steal. Looks like a great arbitrage play.

  • Jae Jun, is a sloppy reporter. yes pud propostions 1 got around 15.000. below is what they PSE paid:

    PSE’s campaign for a “no” vote consists of scare tactics to sow fear, uncertainty and doubt, not the facts. Their “local” committee consists of employees of a political campaign firm in Seattle, whose address is the UPS mailbox store in Burlington. As of October 13, 2008 PSE has contributed over $ 420,334.65 of funds paid by customers to their committee in order to defeat PUD Proposition 1.

    For more information there are two more websites:



  • @ Whatever
    I’m not a reporter. I’m writing this from an investing viewpoint. Please read it again carefully and I won’t bother with a reply unless it’s got to do with the topic.

Ready to try Old School Value?