Merrill Lynch & Co. |MER
Bank of America Corp. |BAC

Deal value $19.8 billion

Spread 11/25/08 95 cents, or 8.6%

The $20 billion merger of Merrill Lynch & Co. with Bank of America Corp. goes before BofA shareholders with some skepticism. That BofA vote will determine the outcome of the quasi bailout of the investment bank.

BofA is buying Merrill Lynch in a stock swap with a fixed exchange ratio at a spread that offers an annualized return of 85% if the deal closes on schedule. The merger requires an approval by a simple majority of shareholders of each company. The votes are set for Dec. 5.

The arb question: The deal now seems expensive for BofA, but asset values in banking are in flux, to say the least. What will happen in the short term? BofA's board does have the option under the merger agreement to change its recommendation. But CEO Kenneth Lewis has said in recent weeks that the deal is on track and expected to close before the end of the year.

BofA shareholders have not raised public opposition to the merger and the top holders, at roughly 3%, are not typical activist funds. There is little precedent for the buyer's shareholders voting down a large deal without some vocal opposition. Some of the spread certainly represents the risks in Merrill's CDO-loaded business.

BCE Inc. |BCE
Ontario Teachers' et al.

Deal value C$38 billion

Spread 11/24/08 C$4.81, or 12.7%

For the risk arbitrage market, the banking, credit and general economic crisis has an embedded irony -- perhaps government bailouts of bank lenders mean the few remaining big deals with credit risk will really get funded.

The recent close of InBev NV's acquisition of Anheuser-Busch Cos. fell partly into this category and partly into the category of the recession-resistant and unique strategic merger. Arbs monitoring third-quarter beer sales have also observed that spam sales have spiked and may be looking for near-term, processed-meat consolidation. The Bud deal did close, but not before scares that its European bank lenders might falter before the funding was closed.

The buyout of Canadian telecommunications company BCE Inc. has followed a similar track, if more concentrated on the fate of Citigroup Inc. From an arb perspective, one of the benefits of the Bud deal was the breadth of the debt syndication. BCE is funded by few parties: Citi, Deutsche Bank Securities Inc., Greenwich Capital Markets Inc. and TD Securities (USA) LLC.

And Citi has about $13 billion of the $34 billion commitment. With market uncertainty over Citi, the BCE deal spread suffered.

The BCE transaction is scheduled to close Dec. 11, following a merger agreement amendment of July 4. Under the revised deal, the sponsor's termination fee increased from $1 billion to $1.2 billion. The deal, however, does not hinge on financing, and with the extension of the merger agreement, the banks and buyer entered definitive credit agreements. The merger close remains conditioned on the provision of a solvency opinion by KPMG LLP. BCE has not disclosed any problem with the solvency opinion and would have if a problem was expected, a company spokesman says.