Arbitrage Opportunity – Brookfield Infrastructure Partners (NYSE:BIP) takeover of Prime Infrastructure Group (ASX:PIH)

Details of take over:
Holders of PIH will receive a combination of cash and BIP stock. For each PIH share, holders will receive
·         0.24 BIP shares
·         $AUD0.20
Go long PIH @ $AUD4.80 (ASX:PIH)
Short BIP @  $USD20.13 (NYSE:BIP)
Return = 4.7652/4.439 – 1 = 7.35%

Some Risks
Deal does not proceed:
Main risk is that deal does not proceed, and PIH returns to pre deal levels.
FX Risk
You have a long AUD currency position on the $AUD0.20 payment to be received on the 8 December 2010 – although you can lock this in by buying USD now
Execution Risk
NYSE and ASX trading times do not overlap. This makes it difficult to enter and exit the trade since there is never full information at hand:
·   If there is a big move, could be closed out of one half of position – before other market opens to net off position. This is especially true if you have leveraged in to position.
·   i.e. if BIP has a big rally – you could be stopped out of your short position if you do not have enough collateral despite the fact that you would expect PIH to have an offsetting rally when it opens in Sydney time.

(contributor: , with credit given to Steve Kempler)

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