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Concentrated Merger Arbitrage Funds – Q1 2024 Update

  • May 23, 2024

This is our third update about new merger arbitrage related positions at funds that tend to have concentrated positions in their portfolio. You can find our first update here and our Q4 2023 update here.

There are currently 78 active M&A situations in the U.S. ranging from highly risks deals like the acquisition of Capri (CPRI) by Tapestry (TPR) that is trading at a spread (potential profit) of almost 65% to the management-led take private of Astra Space (ASTR) in a tiny $15 million deal, which is trading at a negative spread of 22%.

Top Merger Arbitrage Deals
Top Merger Arbitrage Deals

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 first  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 seven funds I am tracking. I used to track eight funds but one of them terminated their registration with the SEC in February. The common theme appears to be participating in pre-deal or rumoured deal situations and increased use of options to either protect downside or juice returns on the upside.

  • Hewlett Packard Enterprise’s (HPE) $14.31 billion all cash acquisition of Juniper Networks (JNPR) for $40 per share with its current spread of 15.71% (not including any dividend payments) was a new position for six out of the seven funds. One of them decided to hedge their position with put options. Expected closing early 2025.
  • Blackstone’s $3.5 billion all cash acquisition of Tricon Residential was a new position for six funds. The deal closed earlier this month.
  • Nippon Steel’s $14.9 billion all cash acquisition of United States Steel (X) for $55 per share with its current spread of 54% was a new position for one fund. Much to my surprise, four funds, which already had a position in U.S. Steel, added to their position. Expected closing end of 2024. This cross-border deal has been in the cross hairs of politicians during an election year.
United States Steel Spread History
United States Steel Spread History
  • Boston Scientific’s (BSX) $3.17 billion all cash acquisition of Axonics (AXNX) for $71 per share with its current spread of 5.82% was a new position for four funds. Expected closing end of 2024.
  • Capital One Financial’s (COF) massive $35.3 billion all stock deal for Discovery Financial Services (DFS) with a spread of 14.43% was a new position for four funds. Expected closing is around January 31, 2025.
  • AstraZeneca’s (AZN) $2.4 billion “special conditions” deal for Fusion Pharmaceuticals (FUSN) was a new position for four funds. Two of them hedged their position with put options. Expected to close this quarter. The deal is structured as $21 per share in cash and a contingent value right (CVR) of $3 per share based on the achievement of a specified regulatory milestone.
  • Walmart’s (WMT) $1.88 billion all cash acquisition of Vizio (VZIO) for $11.50 per share with a spread of 8.85% was a new position for four funds. Expected closing is end of 2024.
  • Thoma Bravo’s $1.5 billion all cash acquisition of Everbridge (EVBG) for $35 per share with a tiny spread of 0.69% was a new position for four funds. Expected to close this quarter.

There were several other new positions but three funds or less started those positions or the deal had already closed by the time the 13-F filings were released.

It is worth mentioning that Chevron’s $60 billion all stock acquisition of Hess (HES) was a new position for two funds and they joined four others that already had a position. Exxon’s acquisition of Pioneer Natural Resources (PXD) closed this month and was a position for all seven funds, including four that added to that position in Q1 2024.

Two funds purchased put options on Capri (CPRI) and one added to their position. Over the last two quarters six funds had started a position in Tapri’s (TPR) embattled acquisition of Capri for $57 per share in cash.

After reviewing these portfolios and their new additions I am inclined to take a closer look at Fusion Pharmaceuticals (FUSN), Axonics (AXNX) and Juniper Networks (JNPR).

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.