Fallen Deals Weigh Upon UST Buyout

Some investors who bet on the outcome of mergers are in withdrawal.

At least, they aren't touching smokeless-tobacco producer UST Inc. Its shares closed at $68.75 Friday even though cigarette-maker Altria Group Inc. plans to pay $69.50 a share in a $10.4 billion takeover on Jan. 7.

That price gap may seem small considering the huge swings in stocks each day. But while the broader market has lots of risks, UST shares are backed by a fully funded cash offer with an imminent closing date.

Investors who buy UST shares now could lock in a 20% annualized return if the deal proceeds on schedule. Normally, arbitragers whittle down such profit opportunities once deals are in the clear. One said the return on a deal like UST would have been less than 10% if it had occurred a year ago.

There are no visible hurdles to explain the richer return. Regulators have approved Altria's transaction, and all debt financing has been agreed.

Still, memories of collapsed deals are all too fresh. Credit problems have ruined a slew of buyouts in recent months and devastated trades that hinged on their completion. That has left arbitragers on red alert against hidden snags.

UST isn't alone.

Investors who bet on Rohm & Haas bear a concrete risk. While the payoff in UST shares is more modest, it takes imagination to name a downside.


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