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Concentrated Merger Arbitrage Funds – Q4 2023 Update

  • February 20, 2024

For the first time last quarter, we published an article that included a list of new merger arbitrage related positions at funds that tend to have concentrated positions in their portfolio. There are currently 82 active arbitrage situations in the U.S. ranging from highly risks deals like the acquisition of Spirit Airlines (SAVE) by JetBlue (JBLU) that is trading at a spread (potential profit) of 364% to the merger of Six Flags (SIX) and Cedar Fair (FUN), which is trading at a negative spread.

The concentrated funds I like to track prefer to pick and choose among those situations and tend to concentrate more than 50% of their portfolio in their top 10 positions. To reiterate what we wrote about 13F filings in our last article:

“Investment firms with over $100 million in assets are required to file form 13F with the SEC within 45 days after the end of each quarter. This filing provides a small window into the fund manager’s portfolio and is a great source for new investment ideas. You also end up with information that is potentially stale and as many investors have come to find out, you can’t just follow someone else into an idea without doing your own deep due diligence. The Gurus section of InsideArbitrage includes curated lists of professional investors and fund managers categorized based on their investment style.

We are currently tracking 49 event-driven funds of various sizes. There are firms with just 3 positions in their 13F portfolio and others with thousands of positions. This does not mean the former has their entire portfolio is just 3 positions as they may have exposure to other positions, including private companies, which  don’t have to be reported on the 13F form.”

I am going to focus on some of the new additions across the eight funds I am tracking. The common theme appears to be commodity related deals and biotech deals.

  • Exxon Mobil’s all stock acquisition of Pioneer Natural Resources (PXD) with its current spread of 4.18% (not including any dividend payments) was a new position for seven out of the eight funds. One of them liked the deal so much, they also started a position in Exxon Mobile (XOM). The deal was rumored for several months before it was confirmed.
  • AbbVie’s (ABBV) all cash acquisition of ImmunoGen, which closed 74 days after announcement on February 12, 2024 and at one point in December sported a spread of 7% was a new position for six funds. What is surprising is that AbbVie’s other deal to acquire Cerevel (CERE) for $45 per share in cash, which was announced just days after the ImmunoGen deal, was only held by two funds. The Cerevel deal received a second request from the FTC last Friday, causing the spread to spike to 9.69%.

Cerevel Deal Spread Changes

  • Bristol-Myers Squibb’s (BMY) all cash acquisition of Karuna Therapeutics (KRTX) for $330 per share was a new addition for five funds. The deal trades at a current spread of 3.65% or 10.18% annualized if it closes by mid-2024.
  • The other big oil deal where Chevron (CVX) is acquiring Hess (HES) in an all stock deal worth $60 billion was a new addition for four funds. The spread on the deal is currently 7.62% or 21.22% annualized if the deal can close by mid-2024. Because this is an all stock deal, an investor would have to short Chevron stock to capture the spread. One of the funds also started a position in Chevron call options, potentially as a way to hedge their short position.
  • Thermo Fisher Scientific’s (TMO) all cash deal for Olink Holding AB (OLK) for $26 per share was a new addition for four funds. The deal is trading at a current spread of 14.29% or 39.80% annualized if it can close by mid-2024. This cross-border deal is facing regulatory issues and is being reviewed by both UK’s Competition and Markets Authority (CMA) and Germany’s Bundeskartellamt.
  • In a move that was surprising to me, four funds also decided to start a position in Nippon Steel’s (NISTF) all cash acquisition of United States Steel (X) for $55 per share. They join another fund that already had a position in Q3 2023 and decided to increase its stake by 32% to make it their top position. Three out of these five funds also hold put options on U.S. Steel, potentially to hedge against the risk of this cross-border deal failing. The deal trades at a spread of 20.14% or 32.96% annualized if it can close by Q3 2024.
  • Tapestry’s all cash acquisition of Capri (CPRI) (the home of Michael Kors, Jimmy Choo and Versace) for $57 per share with its current spread of 21.15% or 58.92% annualized was a new addition for one fund, which joined the five others that had already started a position in Q3 2023.
  • We saw one fund purchase a very small long position (0.065% of portfolio) using stock and call options in Spirit Airlines (SAVE). Another one purchased put options on the company.

After reviewing these portfolios and their new additions I am inclined to take a closer look at Olink Holding AB (OLK) and Karuna Therapeutics (KRTX).

Disclaimer: I currently hold long positions in Spirit Airlines (SAVE), Bristol-Myers Squibb (BMY), Cerevel (CERE) and Capri (CPRI). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.