Shortly after the market closed on Friday, Aviva and Friends Life announced the terms for a merger, noting at the top of their release, the recent press speculation into the deal. The speculation was more than in the press, with Friends’ share price outperforming markedly last week on unusually high volume on three out of five days. In contrast, Aviva was a modest under performer on average volume, until today. This tells us a great deal about the nature of speculation into M&A activity, which takes on the characteristics of punting as opposed to arbitrage.
The OTAS Stamp view for Friends Life (above) shows that the stock outperformed peers by 3.4% last week and that volume increased as the week progressed, reaching unusually high levels on Friday compared with the 30 day average. Short interest fell 7% over five days, returning it to almost flat over a month, suggesting that a number of recent shorts may have reversed course. There is no liquid exchange traded market for options or CDS on Friends, which could have provided additional insights.
Volume did pick up in Aviva during the week, although it was not exceptional compared to the recent average levels. The TradeShaper Microstructure chart for Friday shows that volume was on the upper limit of the expected level.
However, the Microstructure also reveals that the shares performed as expected over the course of the day, which we measure by plotting the intraday price against a basket of the most closely correlated shares.
While the volume of Friends shares traded was above average throughout the day, the net traded volume graph below shows that only right at the end of the trading day was there any noticeable net buying. Those speculating on a deal being done managed to place their bets before the market closed, even though the announcement confirming the deal came only afterwards. While this activity may well have included short covering, as the risk of an announcement had clearly risen given the speculation in the press, short interest in Friends had reduced throughout the course of the previous two weeks.
As I write Friends is up a little under 6%, but since the opening print it is down relative to a basket of peers, in part because of the fall in the Aviva share price and with it the value of the deal. There is exceptionally high volume trading in Aviva shares today, which the TradeShaper dynamic prediction currently expects to be 33mm shares, equal to 5.3x the mean expected volume. This indicates that the arbitrage players have entered the market only after the confirmation of the deal terms, which allows them to construct trades accurately.
As an aside, it is worth noting the tick down in the Aviva CDS on Friday, coming on the back of a 7% rise over the previous five days. One rationale for the deal is to allow the cash flow generated from Friends’ business to reduce gearing and improve the dividend cover at Aviva, as well as fund growth.
TradeShaper dynamic intrade analysis may be used by market participants to evaluate emerging stories, in this case driven by press speculation. It would appear that those prepared to bet on a deal taking place were biased to the upside, i.e. taking long positions in Friends Life or closing shorts, as opposed to arbitrage experts who have only entered the market today. The confidence of those making long bets appears to have dramatically increased late on Friday afternoon, which in itself would have held a message for those following this situation closely. TradeShaper Alerts also flagged this exceptional activity to those trading UK shares more passively, enabling them to investigate the situation while the market remained open.