Constellation Energy Group Merger Arbitrage Profits

The S&P 500 was down 4% today, but my merger arbitrage position in Constellation Energy Group (CEG) was up nicely. In fact, CEG shares climbed all the way up to the MidAmerican Energy Holdings offer price of $26.50. The stock was up on news that Berkshire Hathaway (BRKa) submitted its first regulatory filing to complete its acquisition of Constellation Energy. There was also news that Electricite de France SA might make another bid for Constellation. In fact, this latter news helped push CEG share price above $26.50 at the end of the day.

On the way up to $26.50, all 470 shares in the Special Situations Real Money Portfolio were sold. I placed a limit order of $26.40 yesterday to sell my CEG shares, because I was going to be tied up in meetings all day today. I wanted to make sure I didn’t miss any wild positive swings in Constellation share prices if Mr. Market got giddy with any positive news. As I guess, the good news today did drive CEG shares up and over the buyout price.

Do I regret selling today at 26.40 even though CEG shares closed the day at 27.23? I have no regrets, even though a potential $35 per share offer by EDF appears to still be alive. I was only interested in the certain offer by Warren Buffett’s Berkshire Hathaway subsidiary. Once that price was acheived, no margin of safety remained. I’ve also spotted another attractive merger arbitrage opportunity I might exploit tomorrow if there is a delay or failure of the House vote on the bailout package.

So how did I do? I bought 470 shares of CEG on September 29, 2008 for an average price of $22.38 per share. The total cost of those shares was $10,517.87. Today, four days later, I sold the 470 shares for $26.40 a share, for a total payout of $12,400.97 after costs. My total profit came to $1,883.10, a 17.9% return. It is very rare that you can get a total return of almost 18% for a merger arbitrage opportunity. It’s even rarer to realize that gain in just four days. The average annualized return for annualized return of 1,634%! That trade helped push the Special Situations Real Money Portfolio up to year-to-date return of 24.36%.

Disclosure: I own shares of CEG but no holdings of any other stocks mentioned.

2 thoughts on “Constellation Energy Group Merger Arbitrage Profits

  • October 3, 2008 at 5:55 pm

    good job George. Time to keep an eye out on BUd and AW

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