Puget Energy Merger Delayed

It has been announced that the PSD merger will not close by the end of the year. The merger agreement requires closing the deal 15 business days after all requirements have been met, including approval by the Utilities and Transportation Commission. Today being the 12th and not expecting an announcement this week, we run out of days in December for it to work out.

A New Question Regarding The Merger

On hearing the news, a slight concern related to financing came to my mind. What happens to the capital if the financing condition is based on a closure date of 2008. Would the money still be available in 2009?

After reviewing the Proxy statement, it does not reveal anything related to deadlines or timeframes for financing. I’ll consider this as the capital still being available in 2009.

Scanning through the proxy also served as a reminder to check on the banks (Barclays and Dresdner) providing the debt financing. (No comments on this yet.)

Going deeper into search led me to think about the ownership and how the Macquarie people were involved.

Ownership Interest

The latest 13D statement from Oct 2, 2008 shows the ownership of the Macquarie shareholders. Additionally, the notes bring up some interesting information, but first, the ownership is as follows:

  • Macquarie Infrastructure Partners A, L.P. – 1.3%
  • Macquarie Infrastructure Partners International, L.P – 1.4%
  • Macquarie Infrastructure Partners Canada, L.P. – 0.3%
  • Macquarie FSS Infrastructure Trust – 0.4%
  • Macquarie Asset Finance Limited – 1.5%

In total, Macquarie holds 4.9%. This is not a huge amount but it does show that the buyer is serious.

Regarding the notes, there is a section which states;

“On October 2, 2008, Padua MG Holdings (PMGH) transferred all of the shares of Common Stock that it held to Macquarie Asset Finance Limited (MAFL). As a result of the transfer, PMGH no longer holds any shares of Common Stock……

Macquarie Capital Group Limited (MCGL) is the operating company for Macquarie Group Limited (MGL) non-banking operations. MCGL often invests alongside Macquarie Group managed funds in investments similar to the acquisition of Puget in an underwriting capacity. This is the case for the Merger, and MCGL expects to sell down either the shares of PMGH or PMGH’s minority position to other Macquarie Group-managed funds prior to financial close of the Merger or shortly thereafter.”

It seems like the price drop starting Oct 2 may have been part of Macquarie’s process of acquiring shares from other holders. It’s also exactly at this time the market started going nuts. So all of this, being part of the process, was probably overshadowed by mad Mr Market. Talk about timing.

Odds of the Merger

Time for a numbers update. Here are the figures I am now applying considering all the information I’ve laid out here and in previous posts.

Upside Potential: 23%: $24.41 -> $30

Downside Potential: 20%: $24.41 -> $20

Probability of Success: 80% (probability decreased due to my financing worries)

Probability of Failure: 20%

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

It’s also important to note that the upside and downside percentages are inversely correlated. If the price goes up, the upside decreases and downside increases and vice versa.

Other Points

From my previous posts, it’s very clear that the Public Counsel is trying to delay the merger. As I don’t understand the way business works at the UTC I have no way of answering why they can’t just ignore the Public Counsel and get on with the job. Maybe it’s part of the Public Counsel’s job description to oppose everything. Who knows..? So from today on, I’ll probably deduct the influence the Public Counsel may have in preventing the merger.

A reader asked me what other situations I have been looking into. My arbitrage strategy is to focus on one at a time so that I have a understanding of the whole picture rather than knowing bits and pieces and filling in the blanks with my own assumptions. There is so much uncertainty to a deal that missing vital clues could be disastrous. This is a risk of why arbitrage isn’t for those that don’t have the time to try and find everything.


Long PSD at time of writing.

[tags]arbitrage, merger, psd, puget sound, Special Situations[/tags]

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