Category Archives: Merger Arbitrage

Actelion (CH0010532478) – Merger arbitrage with a potential Spin-off “Gold Nugget” ?

Yesterday, Johnson and Johnson announced that they intend to acquire Actelion, the Swiss Biotech company for 280 USD per share.

The stock price jumped to around 272 CHF/USD right after the announcement indicating a relatively high probability of closing. J&J has enough money on their bank account and according to the press, most Actelion shareholders should be happy.

Closing date is targeted as June 30th. So if everything goes according to plan, this would mean ~2,9% yield for 5 months which is not bad but not that great either (as there are always risks) , so why bother ?

However there is an interesting specialty in this case which I didn’t see when I first looked into it. The official announcement contained this potential “golden nugget”:

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Bayer vs. Monsanto: Who is the “patsy” at the Poker table ?

One of the highest profile merger cases at the moment is the Bayer / Monsanto case.

A quick recap:

In may 2016, Bayer made a proposal to buy Monsanto. The first offer was 122 USD per share which was rejected. Bayer increased the offer 2 times, first to 125 USD and currently to 127,5 USD.

The big question is: Why is Monsanto only trading at 107 USD (at the time of writing)? Compared for instance to the initial ChemChina/Syngenta deal spread, the Bayer case looks a lot more solid:

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Updates: Energiedienst (CH0039651184) & Vossloh (DE0007667107) voluntary tender offer

Energiedienst

My first transaction this year was to sell my shares in Energiedienst.

Looking at the Swiss Francs chart, where Energiedienst has its primary listing, this looks like genius timing:

However in Euro, it looks pretty stupid:

In Euro, the shares jumped from around 25,20 EUR to around 27 EUR at the time of writing, a upmove of around 7% against a loss in Swiss Francs of around -10%.

So what happened ? Well in case you were not on a Moon mission last week you might have heard about that Swiss Franc “thing”. The Swiss Franc increased around 17% against the Euro within a very short time frame. What we can see above is relatively easy: The stock price in Swiss Franc fell, but not enough to off set the CHF/EUR movement. This is very strange, especially in the case of Energiedienst.

Energiedienst operates (based on sales) around 85% of its business in Germany and only 15% in Switzerland. So even if we assume that the business in Switzerland is not negatively affected, the increase in EUR should have been theoretically only 0,15*17%= 2,6% in EUR and not +7%.

If we look at Swiss Power prices however, we see something interesting: With the exception of the one day, they directly adjusted in EUR terms as we can see here for instance in the Swiss 1 year forward electricity prices:

swiss power EUR

So in this case, electricity prices seem to be more efficient than stock prices, as there seems to be a very quick and liquid market to arbitrage away those currency differences quickly. Nevertheless I lost money by selling to early but in this case it was not my fault.

Vossloh

Back in September, I presented Vossloh as a potential fallen angel with activist involvement. This is what I wrote back then:

Based on today’s price of ~49 EUR this would mean a potential upside of 35-68%. However one should assume that this turn-around needs at least 3 years. For a turn around, I personally would require a higher return than for a normal “boring” value stock as there is clearly a risk that the turnaround does not work out as planned.

If I assume a target return of 20% p.a., i would need to be sure that the price of Vossloh is in 3 years at around 85 EUR. This is clearly at the very upper end of my target range. So I would either need to have more aggressive assumptions or I would need a lower entry price. As a value investor, I would not want to bet on growth or on a shorter time frame for the turn around, so the only alternative is to wait for a lower entry price.

Taking the midpoint of my range from above at 74, I would be a buyer at ~42 EUR per share but not before.

On November 7th, Vossloh actually hit the 42 EUR threshold but somehow I was not quick enough and passed to buy some shares. Since then the shares recovered nicely to around 54 EUR when yesterday, the following news hit the wires:

On 20 January 2015, KB Holding GmbH decided to make a voluntary public takeover offer to the shareholders of Vossloh Aktiengesellschaft, Vosslohstraße 4, 58791 Werdohl, Germany, for the acquisition of all ordinary bearer shares with no par value, each share representing a proportionate amount of EUR 2.84 in the share capital (the ‘Vossloh-Shares’).

KB Holding GmbH intends to offer the payment of a cash consideration per Vossloh-Share in the amount of the weighted average domestic stock exchange price during the last three months before the publication of this
announcement according to Sec. 10 para. 1 sent. 1 WpÜG pursuant to Sec. 5 para. 1 and 3 of the Regulation on the Content of the Offer Document, Consideration for Takeover Offers and Mandatory Offers and the Release from
the Obligation to Publish and Issue an Offer (WpÜG-Angebotsverordnung), as determined by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). This consideration is expected to be in a range between EUR 48 and 49 per Vossloh-Share and will be published immediately after being notified by BaFin.

KB Holding GmbH currently holds 29.99 percent of the shares in Vossloh Aktiengesellschaft.

The stock managed to gain some more and closed at around 56 EUR per share:

So the first question is: Why does he offer 49 EUR per share if the shares are trading already at 55 EUR ?

This one is pretty easy: Thiele was already owning 29,99%. In Germany, once you cross 30%, you have to make a mandatory offer at the trailing 90 “VWAP” stock price. My guess is that Thiele clearly wants to take control, but maybe not now and not at 55 EUR. So he used the occasion to come out with this lowball offer, because this releases him from any further mandatory offers and he is not forced to take more shares than he actually wants.

After the offer has expired and Thiele has crossed 30%, he only needs to disclose purchase once he crosses 50% and even then he does not need to make a mandatory offer as the voluntary offer releases him from making any subsequent offers.

Is the stock still attractive at that level ?

Well, we know now that Thiele clearly wants to take control. But we also know that he is a very shrewed operator with little interest in minority share holders. He controls the management of the company already (he actually hired the new CEO) as he ist already the strongest shareholder.

For anyone who followed the blog and the German Corporate law discussion, the biggest issue is the following: Under current law, Thiele could decide (or his CEO) to delist from the stock exchange. This is now possible in Germany without even getting any kind of shareholder approval. This would force many funds out of the stock as normally unlisted stocks are not permitted under most fund regulations. Even for hardcore hold outs this would mean low or no transparency etc. etc.

I have seen a recent study (Solventis, “Endspiele”) that since the change in law (or the change in interpretation), on average stocks lost around -25% following the announcement of a delisting.

Overall, at the current price the risk/reward ratio is in my opinion neutral. There is some room left with regard to a fair value and mean reversion, on the other hand one should be careful with regard to any minority unfriendly actions from Thiele & Co.

As a learning experience, I should maybe watch my watchlist a little bit closer in order not to miss such opportunities as in November.

R. Stahl (ISIN DE000A1PHBB5) – Another “failed take-over” special situation ?

Usually, I try to stay away from a “true” Merger Arbitrage as this is mostly a typical “shark tank” situation where as a small investor, the chances are pretty high to end up as shark food. However the situation when a first attempt fails and the price pulls back, it could be more interesting. In cases such as Rhoen Klinikum ,the interesting aspect is that suddenly the “true” value or “control price” of a business is revealed when a bid is made. With this information, one can more easily calculate the odds and expected returns.

The attempted take-over of R. Stahl by closely held German company Weidmüller was a special case anyway. In April 2014, German company Weidmüller made an “unfriendly” offer to all R. Stahl shareholders offering 47,50 EUR under the condition that 50% of shareholders accept the offer. Later, they increased the offer to 50 EUR, which was significantly higher than the “undisturbed” price of around 34 EUR.

The strange thing about the offer was the fact, that 51% of the company is held by the heirs of the founding family and further 10% is held by R. Stahl themselves. The families directly commented that they won’t sell and of course R. Stahl’s management was also not a big fan of this transaction, so the Treasury shares were out of question as well.

Not surprisingly, on July 4th, Weidmueller released that the offer has expired as only ~17% of shareholders have tendered their shares.

R. Stahl as a company

Let’s take a step back and look at R. Stahl as a company. In my opinion, R. Stahl is one of the typical “hidden Champions” of the German “Mittelstand”. They specialize in electrical installations within potential explosive environmenta (chemical plants, gas/oil etc.). The company is financed “rock solid” and has shown good growth in its core business for quite some time althoughresults did not fully trail rising sales.

I actually owned R. Stahl back in 2003 when it was a turn around case. I do have prove for this as I opened a discussion thread at “wallstret:online” back in 2003 when the stockprice was around 5 EUR per share and which is still active. I sold at 17 EUR and thought I was a genius and missing the next 100% in 2 years…

R Stahl does not look too expensive. Although P/E is around 19, EV/EBIT and EV/EBITDA look pretty cheap. EV/EBIT of 7,3 for instance is pretty cheap and is not even adjusted for the 10% treasury shares which should be deducted from EV. The latest quarter didn’t look that good as R. Stahl suffers to a certain extent from the lower Capex of its mein customers, oil and natural gas companies.

R. Stahl was actually on my watch list after the fell in the beginning of 2014 however the Weidmueller offer came before I could look more closely into the accounts.

Back to the failed Weidmueller offer

So the question is: Why did Weidmüller make this offer anyway? To be honest, I don’t know. I researched a little bit and it seems, according to some newspaper articles (for instance here), that Weidmüller had contacts to the family before and that maybe the families are not such a “solid block” at all. In this other article there is an interesting comment that chances were not so bad after all as family controlled companies are more open to sell to other family companies like Weidmüller. They also mention “Phoenix Contact” as another potential buyer.

The combination of Weidmueller and R. Stahl seems to make some sense as this interview with the Weidmüller CFO clearly shows. It was clearly not a cost cutting project but a growth project.

Interestingly, the stock price did not retreat to the “undisturbed” level, but is hovering around 41 EUR, clearly above the level before the offer.

Q1 numbers which were issued after the first Weidmüller offer did not look so good, so this is not an explanation for the still elevated stock price.

Is this interesting ?

A very simple way to look at this is making the following assumptions:

– something is happening within 1 year, either deal or ultimately no deal
– the “undisturbed” price is EUR 34.
– the control price is 50 EUR per share
– I want to make an expected return of 15% p.a.

Then I can solve for the implict required probability of a 50 EUR deal happening within 1 year:

41*1.15 = (Prob*50) + (1-Prob)*34 or (41*1.15-34)/16 = Prob

Based on those assumption, I would need to apply a 82% probability in order to have a 15% expected return on investment. I think this is much too high for my taste.

At the moment, I would assume that there is a 50/50 chance. With this assumption, I can calculate my required price level where the stock gets interesting.

This would be then the follwoing calculation:

0,5*34 + 0,5*50 = Price *1.15 = 36,52 EUR. So at 36,52 EUR per share I could get an expected return of 15% with odds at 50/50.

Now we can make another assumption: Let’s assume we are still at 50/50, but we assume that any acquirer has to pay more than 50 as the 50 were clearly not enough. So lets say 55 EUR. Then my target price would be around 38,69 EUR per share where I would be prepared to buy.

In reality, of course the outcome will not be so binary, but I think this framework is a good way to get a feeling for an intersting entry point. For me, the current price level of 41 EUR is a little bit to high, but I think this could be interesting around 38,50 EUR as a special “failed M&A” situation.

Activist angle

There is a further interesting angle. A smaller, but in expert circles well known investor (Scherzer) has released an “open letter” to the management and board during the offer period. There they critize that from the beginning Management and board were against the offer despite the fact that they are obliged to work for the benefit of all shareholders and not only the founding family. The letter contains some other interesting info, such as that the Head of the supervisory board had actually sold shares in the market before etc. etc.

The target of this letter is clearly to put pressure on the family in order to “Motivate” them making an offer to minority shareholders at the “eidmueller” price. I am not sure how the chances of success are here, but this could increase the odds towards an “event” as described above. I am not a lawyer, so I cannot fully judge if the potential legal issues mentioned in the letter with refusing the offer are enough to build a case against them but it clearly increases the leverage.

The question for me is: Does this move the “needle” far enough t justify an investment at the current price of 41 EUR ?

Summary:

Although the failed R. Stahl offer is clearly different from my succesful Rhoen investment, the situation itself is interesting. However for my taste, the current price of 41 EUR is a little bit to high compared to the undisturbed price of around 34 EUR in order to justify an investment. For me, this would get very interesting at a price of around 38-39 EUR at the curent stage. I will watch this one closely…..

Celesio Merger arbitrage “Post mortem”

So roughly 10 days after the first failed attempt, Haniel today announced that they have an agreement with both, McKesson and Elliott and that Haniel will sell for 23,50 EUR per share to McKesson.

What happened in between ? Elliott, after the failed attempt further increased its stake to 32% (including convertibles).

In a second step, Elliott sold its stake for an undisclosed price to Haniel, which then in turn sold the 75% plus stake to McKesson at the initial 23,50 EUR.

This structure achieved the following goals:

– Elliott got more than 23,50 EUR
– McKesson does not have to pay more than 23,50 EUR

The “Looser” is clearly Haniel, which will have proceeds lower than 23,50 EUR per share. A friend of mine argued that most likely Haniel paid 24,50 EUR which would roughly equal the initial 23 EUR per share. If this is that case, then we would have the paradox outcome, that the majority owner got the lowest price, the minority a little bit more and the Hedgefund the most.

This is something to keep in mind for potential future merger arbitrage deals: The minority shareholders might not get the same deal as the activist shareholder, at least in the cases where a majority shareholder is selling. In this case, the minority holders got a 50 cent better price than the initial bid, but I could imagine scenarios where there is also the risk of a lower bid.

Interestingly, the stocks jumped today over 25 EUR, I guess some people are already speculating on a compensation payment following the Profit & loss transfer agreement which is the logical next step after the purchase.

Personally, I don’t think that there is a lot of upside, but who knows ? In any case, I think Elliott played that one pretty well for themselves. In any case, this is a hard blow to JP Morgan as M&A advisor to Haniel.

There could be open questions if the whole deal could be interpreted as “acting in concert” between Elliott, Haniel and McKesson. In this case, the bid for all shareholders would need to be increased to the price paid from Haniel to Elliott. I have no idea how likely that is and would not bet on this either.