Celesio Merger Arbitrage update: A new shark wants a bite

Late last year, I joined the merger “arbitrage” play when US based McKesson wanted to take over Celesio. I did exit the position with a small profit soon therafter, as I was not really sure what was going on.

This deal was clearly “shark infested” with Elliott, the smart and aggressive US Hedgefund on the one side, Goldman as advisor of McK on the other. Nevertheless it looked very strange that Elliott seemed to have went away with only 50 cents more than the initial offer of 23,50.

Interestingly, the stock price went up above the offer price afterwards as we can see in the chart and I was wondering why:

Yesterday, this WSJ article then was very surpising:

Another big shark has joined the scene: Magnetar, one of the most (in)famous US Hedge Funds (“Big Short”). They seemed to have looked into McKessons disclosures and found this:

Magnetar accuses McKesson of offering a higher price to one large Celesio shareholder, Elliott Management Corp.

Later in the article, more details are given:

To win Elliott’s consent, McKesson paid it nearly €31 for each convertible bond, the lawsuit claims.

Documents published by McKesson indicate it did pay the equivalent of €31 a share for Elliott’s convertible bonds. Other convertible bondholders received the equivalent of €23.50 a share.

We believe McKesson’s actions were specifically aimed at evading the minimum price rule in German takeover law, and resulted in offering only €23.50 per Celesio share to minority shareholders, whilst paying a look-through price of up to €30.95 per Celesio share through the acquisition of convertible bonds,” Magnetar said

In my post back then I had written that the 2018 convertible bond had the highest annoyance factor in the capital structure:

In total, the 2018 convertible will be exchangeable into 19 mn shares, more than 10% of total outstanding shares at any time after the take over happens. However, this could turn out to be a big problem for McK. Any company doing such a takeover wants to get rid of minorities as quickly as possible and is therefore trying hard to squeeze out shareholders and delist the company.

With the 2018 convertible, this could be very difficult. Even if McK owns more than 95% of the shares, convertible holders could suddenly convert bonds into shares and then make a squeeze out impossible. The 2018 convertible therefore has a quite high “annoyance factor” for McK. In general, when a company has a more complicated capital structure, an “annoying” security can be a very good security to own.

So Elliott seems to have cashed in the “annoyance factor in a private deal and McKesson agreed because they thought that the German take over rules (same price for everyone) does not apply to convertible bonds.

Magnetar, which seems to have held convertibles as well has obviously a different opinion and is now sueing McKesson. Elliott looks safe, but the maybe Magnetar gets another bite out of the “big whale” MCKesson. If this would be the case, this would be a further embarresment for Goldman who were Mcks advisor.

Honestly, I although I thought through many scenarios in this , I did not have this scenario on my radar screen, otherwise I wouldn’t have sold the convertibles but tendered them into the offer.

Nevertheless a very interesting story and a great learning experience. If guys like Elliott or Magnetar turn up, you should definitely be sure not to end up as shark food.

I still don’t understand why the stock currently trades at 25,80 EUR or so but this is another story.


  • Hi mmi,

    I want to notify you about an interesting development in SMT Scharf and your opinion/perspective about that. SMT is world market leader in the monorail mining equipment (coal mining). SMT earnings were hit bc of the suspension of investments in equipment by miners (fear of weak economy and slowing energy demand). Frank Fischer of Shareholder Value AG took a position a couple of month ago and replaced 3 directors this month. [I highly recommend to follow his investments. He brought Reply SpA. You discussed Reply**. A multi bagger in my portfolio by now.]

    I have valued the SMT myself (see my blog). I think it might be an interesting opportunity. Whats your opinion?

    **: Reply SpA: You discovered a red flag in the books of Reply. I think this flag has its source in an accounting related to the Motorola R&D acquisition and state subsidiaries for R&D. To a large extend European software companies finance their R&D (30-80%) through state / EU subsidiaries – its kind of they pay the R&D and you sell the R&D with a nice user interface. Many software companies only exist because of these subsidiaries! A typical subsidiary is structured this way: submit an project application and get 1 million for the project over next 2-5 years. What happens typically, is that the state delays its payments (hint: Euro crisis). They find always some reason to delay the payments 1-2 quarters, but essentially the company gets the money. As they delayed the payment, the subsidiaries were accounted to receivables instead to produce cash flows.

    • #oli,
      thanks for the comment.

      #Reply: The problem was not that they got the cash but the way they accounted for it (as operating cash flow instead of investing cash flow). I still think it was the right decision not to buy despite becoming a multi bagger. In the long run it pays out to stay away from companies qith questionable and/or aggressive accounting.

      #SMT Scharf: Not my cup of tea.Frank Ficher is a good investor, but I have the impression that he mostly uses “secondary” investment ideas 😉 This one looks like his first activist campaign. But thank for the heads up, I will watch this one closely.


  • Naja… mit der Ausgleichzahlung bekommt man 3% pro Jahr. Das dürfte wie bei deiner MAN sein. Bekannter Zinssatz und Verlustrisiko nach unten begrenzt.

  • Wenn man bedenkt, dass die Variante (Prämie in die Wandelanleihe verpacken) nur gewählt werden konnte, weil die BaFin das für ‘gangbar’ erachtet hat. Diese Variante stellt aber nur eine von mittlerweile doch einer Hand von Umgehungsvarianten dar. Vorgestern war am BGH die mdl.Verhandlung zum Umgehungstrick der DtBank bei der Postbank anhängig (im Ergebnis wurde dem Streubesitz knapp die Hälfte geboten von dem Preis den die Post (Staat) erhalten hat.)

    Da passt die abgewandelte Überschrift ” Why I would prefer Russian Law to German WpÜG”.

    Auch ein Blick auf die Delistingentscheidung des BGH bestätigt den unzureichenden Schutz. (Aktuellstes Beispiel Magix, hier wird den 30% Streubesitzaktionären die Handelsplattform ersatzlos gestrichen)

    • Mart,

      volle Zustimmung zu allen Punkten. Als Minderheitsaktionär ist Deutschland deutlich schlechter als z.B. Ungarn, was ja jetzt nicht gerade eine hohe Benchmark ist.


    • I am excited about MAGIX. Been following it for some time and am very curious about how it turns out. p.s. as N.N.Taleb would say: no skin in the game

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