Stockpickr: Profit From Merger Arbitrage

First up is petroleum products refiner Giant Industries(GI Quote). The company is getting acquired by Western Refining(WNR Quote) for $77 per share. Let's work through the math on this one: Giant is currently trading around $75.72, or about 1.9% from the acquisition price. Shareholders are meeting on Feb. 27, and the deal will probably close shortly thereafter. So the annualized return is approximately 22%, at a fairly low-risk level.

The spread is probably as high as it is because Western Refining had previously offered $83 per share and then lowered its offer after fires at two of Giant's refineries. The merger arbitrage funds probably got burned, so to speak, and picked up their chips and went home. That leaves an unusually large spread, which we can take advantage of.

Two hedge funds that have played this trade and might still be in it are Gabelli ABC (Check here for Gabelli's other arbitrage plays) and Sowood Capital Management. Sowood was initially seeded by Harvard, and the fund participates in a lot of merger arbitrage and closed-end fund arbitrage plays. Check out Sowood's current holdings.

What I like about Giant Industries is that even in a worst-case scenario (the shareholders don't approve the deal, regulators hold it up, etc.), the company trades for just seven times EBITDA and is a reasonable value here regardless. In other words, there's a margin of safety for a trade in this name.