What I was not expecting is that the spread between the 2 stocks would not only close, but actually become negative in 3 weeks.

Here is what was supposed to happen:

As discussed in the previous article, there is an acquisition play of HBOR3 by HBRE3 structured as a share swap of 0.81553398 HBRE3 share to 1 HBOR3 share.

This would imply that either the shares of HBR should increase by $0.13, or Helbor shares would decrease by $0.11.

Which meant that everything constant, you would make 11 cents per share of Helbor sold when the deal closed.

Here is what happened:

Both stocks started trading higher recently, mainly following the local market stocks which traded higher later in the month.

But notice how HBRE3 climbed much more than HBOR3. I attribute this to two things:

1. The discount to the parity that this was trading to the merger terms, essentially closing the gap;

2. An overshoot by the market, which is inefficient on these small caps which led it to trade above the parity (!)

You can see the chart below how the pair is trading against the parity, and notice that right now it is not only trading around the parity, but about 4% over it, which means it would be profitable to reverse the trade!

How we’ve fared on this trade:

As the markets sometimes smile to us, this proved to be quite a profitable trade over the month, which led not only to us making about $11k per 100k shares on the way in, but also about another $9.5k on the way out.

This adds up to around $20.4k in only 21 days. As we posted only 30% of the short notional as margin for this trade, we actually made 37.43% return over these 21 days.

Above is not considering trading costs.
For those interested, we were able to borrow HBOR3 shares at 0.98% p.a. - basically a steal.
Also the brokerage costs on this were less than 200.00 for all the indicative trades above.

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Final words

As I return to write about this trade, it reminds me about the beauty of the merger arbitrage world.

These kind of trades have a special flavor, as they are quite independent from the overall market, this same type of profits could have been achieved either on a down market or an up market, all that’s needed is for the specific set-up to work.

Usually these trades will close only when the merger actually goes through, but sometimes they will close much earlier because of unknown market forces or volatility as evidenced on the trade above, which increases even more your IRR.

I love to compose our portfolios with such strategies paired with other value investing strategies, meaning that you can achieve high returns, taking risks lower than the market.

On this specific trade, we will keep watching from the sidelines now, but perhaps it will give us more happiness until it closes.

As always, best of luck out there in the markets!

There is a very interesting situation in the Brazilian small caps space currently, in which we have taken a position and believe to be a very asymmetrical opportunity.

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The deal is the combination of HBRE3 and HBOR3, structured as an acquisition of Helbor by HBR.

This deal was announced late last month, with the controlling shareholder who owns the majority of both firms deciding to merge both of them.

1 Presentation - Helbor Share Exchange Offer (OPA)

As for the shareholders of HBR this sounds like terrible news, as the business of HBR is way less risky than Helbor.

HBR is a properties company, which develops and holds commercial real estate like shopping malls, strip malls, hotels, collecting rent from them, hence having quite a predictable and recurring revenue.

On the other hand, Helbor is a typical home-builder, that buys land, builds and tries to sell the apartments, having way less predictable cash-flows, which depend both on the construction costs and the actual sale of the apartments.

Making things worse, both businesses are extremely leveraged with about 7x (net debt/mkt cap) each. So the combination has a potential to be quite explosive, which was displayed by the melting of both names immediately post announcement:

While leverage is not too troublesome for HBR on a standalone basis, as they have cash-flowing assets which can be sold for repaying the debt, for Helbor on the other hand, leverage has been very troublesome as they have struggled with selling the apartments which have been built as can be seen both on the velocity at which they launch new buildings versus what they sell.

2 1Q26 Helbor Release * Typo is credited to Helbor IR team

And evidenced by how much of this inventory is apartments that can be as old as 8 years!!

(1) = Buildings launched until 2017, (2) Buildings launched after 2018.3

If you run the math about 20% of the apartments in their stock are finished. The issues with finished apartments are several: (a) they give the company both maintenance expenses, yearly taxes and HOA expenses; (b) as they took debt to build the apartments in the first place, the interest eats all their profits; and (c) the apartments become obsolete with people preferring to purchase an apartment launched now, rather than 8 years ago!

How to play this?

You might want to argue that the combination of both businesses will be worth more than the standalones because they will have some synergies, and yadda yadda, as the management and controlling shareholder are trying to push on the market - and just buy the stock for what will be a better company.

But… I think there is a more interesting way to make money out of this mess situation.

The idea here is to go Long HBRE3 and Short HBOR3.

HBOR3 currently is trading about 10% above the parity of the merger, (1 HBRE3 to 0.81553398 HBOR3).

If the merger goes through (which the management hinted it will be all done by October), then you will make about 11 cents per share of HBOR3.

As you might have noticed the math results in a negative which makes this trade even better: because you are selling a larger notional of HBOR3 than HBRE3 you are actually receiving a credit of 0.11/share today! And not paying anything when the deal is completed.

Which is exactly how you would make 10% in 2 months.

Now you ask me, isn’t this free money?

Yes, kind of … Well, there is a chance that the deal doesn’t go through: namely, if the minority shareholders of Helbor refuse the merger.

In my opinion this is quite unlikely as you should have noticed that Helbor is a way worse company than HBR. So the shareholders of Helbor should happily vote in favor of the merger.

Another risk is an anti-trust blockage by the Brazilian government, which is even more unlikely than the voting down by the minority shareholders as both of these companies are quite irrelevant in their area of operation (mainly São Paulo).

In this unlikely event of the merger not going through you might think that the stocks would revert to their previous price, which in this case you would make about 20% from your long position in HBRE3 and lose about 22% in your short on HBOR3, netting -2% on this trade.

Now, if you do take a look at the chart of HBOR3 and look at their latest results, you will realize that Helbor is actually in trouble.

So there is a chance that even if the deal falls apart, HBR shares would rebound while Helbor would keep dipping, making this L&S even more profitable.

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Final words

In our opinion this deal is quite asymmetrical, making it a very appealing trade, but please remember, do your own due diligence and research before acting on any of the information above, especially given this trade is a Long and Short, which requires investors to be experienced and know what they are doing!

We do hold this trade, but we can change our mind and our positions at any time without notice or warning. I do think I will update this in the future, but don’t hold your breath.

As always, best of luck out there in the markets!