Tag Archives: Elliott

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.

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.