Disclaimer: This is not investment advice. DO YOUR OWN RESEARCH !!!
Readers of my blog might remember that I already owned Fitbit in late 2018 at 5 USD per share. I was lucky to sell the stock with a small profit before the stock lost more than half of its value in summer 2019:
This is what I wrote initially as part of the investment case:
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”:
Syngenta ChemChina offer
After the failed attempt of Monsanto to buy Syngenta last year, Chinese conglomerate ChemChina made an offer for Syngenta a couply of weeks ago. Other than with Monsanto, the Syngenta board already approved the take over.
The offer itself is as follows:
ChemChina will pay 465 USD. On top of that, anyone who buys Syngenta shares now, will receive the normal dividende of 11 CHF and a 5 CHF special dividend.
If we expect closing at the end of the year, the potential return would be (in CHF) at a current price of 400 CHF:
-400+(465*0,994)+11+5= +77,75 CHF or a potential 19,4% return for 10 months.
This looks very attractive. However the merger arbitrage/event market is a very competitive one and those spread usually don’t come “for free”. So why is there such a large spread ?
US regulatory risk
I guess the most obvious reason is that investors fear that US regulators will try to kill the deal. Syngenta has a signifcant US business. There are several rumors around why the US authorities might challenge the deal, most recently some in connection with the Zika Virus.
The Committee on Foreign Investment in the US (CFIUS) will review the deal because Syngenta, through its US research and production facilities, plays a key role in the US food industry.
The Zika virus problem could force CFIUS’s hand, sources said.
“CFIUS focuses solely on whether an acquisition represents a national security risk,” a Beltway CFIUS expert not involved in the merger told The Post. “I certainly think Zika will be a factor.”
From what I found on the net, the problem is that the CFIUS never really explains their actions, so it is very difficult to judge as an “amateur” what the chances will be. A professional hedge fund clearly has the money to pay for advice, most likely from former members of the CFIUS. This is clearly an information disadvantage form me as small investor.
China FX issues
Another problem I could see is the fact that ChemChina needs to come up with around 44 bn USD in USD financing and this could be difficult if there would be really turmoil in China in the meantime.
They haven’t even refinanced their Pirelli bridge loan yet and at least in the Pirelli case they don’t seem to guarantee those loans:
The new refinancing will be non-recourse to ChemChina, but will have elements of support from Pirelli’s Chinese owner, bankers said.
So I guess the ~20% discount is basically a mixture of regulatory risk and financing/China turmoil risk.
On the plus side, even if the ChemChina deals would fall through, there still could be other players interested such as German chemical Giant BASF.
Is Syngenta then an interesting special situation investment ?
What is bothering me is the following: As I said before, this area is very competitive and Syngenta is a liquid stock (50-100 mn CHF a day) and I do not have any special insights into the situation.As discussed before, I guess I have even an information disadvantage.
The potential downside for a failed bid is at least -25% when we look at what happened after the Monsanto bid:
So if I assume a simple 50/50 probability, my expected value is negative.
Every “event driven” fund is clearly looking at Syngenta which in turn means that they seem to price the risk at the current price and assume a slightly better chance than 50%.
However I clearly have no basis to assume any higher percentage for a succesful outcome.
All in all, in the past it never had paid out to invest into such a situation with an information disadvantage, so I will stay away from this one.
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.
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.
Let’s start with a few quotes from yesterday’s post:
a) It is almost 100% assured that the bid goes through, there is now a “floor” under the stock price at 23,50 EUR
and
I have written above that this was a “Low risk” bet. In reality, I do not know if it was high risk and I was very very lucky or if it was indeed low risk. In statistics, one would call this a “beta error”, assuming that one was right but in reality the probabilities were very different. For me the best way to handle this is to do only small “bets”, keep track of assumptions and outcomes. Systematic “beta errors” in investing in my opinion are very dangerous as this will inevitable lead to some disastrous outcomes in the long run (Bill Miller).
Very rarely, one gets such a direct feedback from the market. McKesson said yesterday around 7 pm that they did not reach the 75% threshold and dropped the bid.
So this was clearly no a low risk M&A arbitrage situation but a high risk one and I was very very lucky to exit just in time.
McKesson themselves seems to be surprised as well:
“This is fresh news to us. We obviously had the support of the management team, we had the support of the family, which obviously was a significant holder, we had the support of Elliott, which was one of the vocal players in this process,” he said. “The best I can speculate is that people either forgot the tender date or they somehow believed that there is more on the other side of this.”
Let’s quickly check the facts:
In their 9th notification, dated January 9th, 2 pm, McKesson reported the following:
As of the Notification Reference Date, based on the regular conversion price, the aggregate number of Celesio-Shares held by the Bidder and/or persons acting jointly with it plus the number of Celesio-Shares for which the Takeover Offer has been accepted plus the number of voting Celesio-Shares which can be acquired through instruments pursuant to section 25a WpHG amounts to 106,213,544 Celesio-Shares; this corresponds to approximately 62.44% of the currently issued share capital and the currently existing voting rights in Celesio. In relation to the acceptance threshold in section 13.1 of the offer document the aggregate number amounts to 107,617,021 Celesio-Shares, which corresponds to approximately 52.94% of the share capital and the voting rights in Celesio on a fully diluted basis.
This was a significant increase against the 44,88% (fully diluted) a day before.
How much did Elliott own ?
This is from their official “recection” notice as of December 23rd:
Elliott Associates, L.P. and Elliott International, L.P. together with affiliated entities (“Elliott”), which own or have an interest economically equivalent to over 25% of Celesio AG (1)
(1) Calculated in accordance with Section 25a of the German Securities Trading Act (Wertpapierhandelsgesetz/WpHG), in connection with Sections 21, 22 and 25 WpHG
Elliott did report surpassing the 25% threshold in late November 2013.
If I read this correctly, they owned 25.1% on a non-diluted basis.
So let’s do quickly the math with what we have available:
| Undiluted | Diluted | ||
|---|---|---|---|
| McK | 107,617,021 | 62.44% | 52.94% |
| Elliott | 42,803,603 | 25.16% | 21.06% |
| Total | 87.60% | 74.00% | |
| Celesio | |||
| Shares undiluted | 170,100,000 | ||
| Shares diluted | 203,281,113 |
So this is interesting: Even with Elliott tendering its full stake, McK was still short 1% to their threshold on a diluted basis.
Could it be that this whole thing was just an accident ? No super-clever play by Elliott but rather a stuoid one ? Were other people assuming like myself that the offer period would be extended ? I don’t know, but I think it would have been better if MCK had said something about the offer period.
Looking back at the Rhoen chart after the first bid failed, one can expect the stock price to be very very volatile:
Anyway, I will watch this from the side line and will be extra carefull with the next M&A arbitrage situation….
On Thursday, acquirer McKesson and Elliott agreed on a slightly increased offer 23.50 EUR (vs. 23 EUR) per share which Elliottt promptly accepted.
Interestingly,the stock trades now higher than the offer:
Apparently, during Wednesday some people already anticipated the increased offer. Technically, the acceptance period has not been extended and closed on Friday, January 9th according to the official statement. Honestly, I do not understand this. If I read §21 of the German take over law correctly, any late change in the offer automatically extends the offer period by 2 more weeks. I will need to double-check this.
The offer for the 2018 bond was also increased to 123.4 according to the amended bond offering document.
So what to do now with the price of he shares trading above the 23,50 EUR offer ?
Going back to the initial post, that’s how I valued the shares back then:
Now if we want to speculate on a top up, we have to make two assumptions: How likely is a top up and how large will it be ? In order to keep it simple, I would assume a 50/50 chance for a top up and as I like “round” numbers, I assume 5 EUR per share or a final offer at 28.
This leads us to the following expected value under those assumptions:
Exp. value Celesio share = (3.4% x 17) + (48.3% *23) + (48.3%*28)= 24.25 EUR or around 10.6% higher than the current share price.
So if we leave aside the rather bad mistake in calculating the upside potential, the price is now where I saw the “fair value” before, although I was totally wrong about the size of the “top up”. The reason that I still can make some money was that I bought below the initial bid price and the stock price did overshoot the offer.
Now we do have a very different situation compared to some weeks ago:
a) It is almost 100% assured that the bid goes through, there is now a “floor” under the stock price at 23,50 EUR
b) on the other hand it is a lot less likely that the bid will be further increased.
I can think of two reasons why the stock is currently trading above 23,50 EUR:
1) People are hoping that Elliott might have one last trick up in its sleeve to increase the offer within a relatively short time
2) Speculation that McK wants to quickly achieve a squeeze out and will buy more shares and/or have to pay some compensation for implementing the profit and loss transfer agreement (similar to MAN).
Overall, the “new” situation for me is harder to grasp and the time frame is more difficult to estimate. One should also expect, that Celesio will show most likely a lot of extra charges etc. in the next few quarters in order to both, build some buffer for Mckesson in the future and to discourage shareholders bidding up the remaining shares.
So for the portfolio, I will exit the position at current prices with a modest gain of around 6.5% for the shares and a little less for the bonds. Not spectacular but also not bad for a 4 week and relatively low risk investment.
One final remark on such M&A Arbitrage situations:
I have written above that this was a “Low risk” bet. In reality, I do not know if it was high risk and I was very very lucky or if it was indeed low risk. In statistics, one would call this a “beta error”, assuming that one was right but in reality the probabilities were very different. For me the best way to handle this is to do only small “bets”, keep track of assumptions and outcomes. Systematic “beta errors” in investing in my opinion are very dangerous as this will inevitable lead to some disastrous outcomes in the long run (Bill Miller).
Rhoen Kliniikum was a special situation, where I took a half position last year. The simple idea was that the failed take over attempt by Fresenius would “revive” at some point in time plus the stock was solid and relatively cheap.
Now it seems that this is paying of sooner than expected. In today’s shareholder meeting, the existing poison pill which killed the take over was effectivly removed according to this article:
The existing requirement that 90% of shareholders have to approve a merger was changed into 75% requirement. This means that the current players which tried to block the take over by Fresenius (Braun and Asklepius, 5% each) either will have to give up or buy some more shares.
Both should e very positive for the shareprice.
AFter hour, the shareprice jumped already ~20%:
If the price gets near the old offer (22,50 EUR), I would sell the position.
Note to myself: Check TNT Express again…..
Yesterday’s post was of course only a first step towards a potential “special situation” investment.
In order to decide if this is actually an interesting investment, one would need to come up with
A) some more considerations with regard to timing
B) at least a rough idea about intrinsic value
With regard to timing, I think it makes sense to look at Rhoen Klinikum, where there was a similar situation:
On April 26th, Fresenius offered 22,50 EUR per share from an “undisturbed” level of 14.76 EUR the day before. Then, when doubts came up, the stock went down to around 16 EUR before once again climbing to around 20 EUR, before then the deal fell apart. Interestingly, the current share price seems to have a floor at the previous undisturbed level.
For TNT Express, the truly “undisturbed” price the day before the offer was 6,34 EUR, so the current price is around 10% higher than that level.
Just as a side remark:
There were a couple of articles which said that there is now a 50/50 chance of the deal happening, like here.
However at current prices(6.95 EUR) we can relatively easily calculate the implied probability of the deal happening:
Undisturbed price: 6.34 EUR
Current prcie: 6.95 EUR
Offer price: 9,50 EUR
So the implied probabality of the deal happening can be calculated the following way:
(6.95-6.34) / (9.50-6.34) = 19.3%.
Anyone who thinks that there is really a 50/50 chance of the deal happening should buy now as the expected share price under this assumption should be 7.92 EUR (6.34 + (9.5-6.34)/2).
Going back to timing: What we haven’t seen here is a upmove of the stock like we have seen with Rhoen. So far we only saw the price going doen and the implied probability of the deal happening decreasing.
B) intrinsic value
This is somwhow difficult. The 9,50 EUR is a “private market” value, maybe including a premium for synergies.
TNT Express since its spin off has yet to prove that they can achieve margins like their competitors. Based on Q3 numbers, they are curently heading to something like 220 mn “operating income” or EBITDA for 2012 which equals an “operating margin” of only 3%.
UPS for example has an operating margin of 11.4%, FedEx of 7.8%. Deutsche Post has an ~9% EBIT Margin in the Express segment. So TNT has definitely some room to improve.
If we assume 8% operating margin, TNT would show ~600 mn EBITDA. Current EV is 3.5 bn, potential EV/EBITDA ~6.
This is much lower than UPS (10x EV/EBITDA) but higher than Fedex (4.9x). Deutsche Post is at 5 times EV/EBITDA.
So at current prices and assuming quite a turn around, TNT Express is not really cheap. So any investment would be a pure “Merger arbitrage” or “control premium” inevstment which might or not work out.
No action yet.
Edit: During writing this post, the share price jumped some 3.5% compared to yesterday, is this the first leg of the rebound ?…..
TNT Express is the express parcel service spun off from PostNL in 2011. I have looked at the stock a couple of times as a spin off situation.
In February 2012, UPS announced it’s bid to buy TNT Express. In march they increased the bid to finally 9.50 EUR.
In the meantime it looks like that there is a lot of unexpected resistence from the European monopoly regulator.
The share now trades below 7 EUR, interestingly this is only a little higher than the “undisturbed” price in January/February which was between 6.10 -6.50 EUR. Since then, for instance Deutsche Post for gained some 15% from February, Österreichische Post even some 20%:
Since February, the correlation to the overall market is very very low, almost close to zero.
So basically, the market now does not believe at all in the takeover, as TNT Express is trading very close (or even below) to its “undisturbed” price. In the meantime they made some progress with regard to the merger, among others they sold their Airline which was one of the preconditions to get the deal approved.
All in all I am somehow “tempted” by this. It is a Spin-off situation which in itself is interesting. Additionally, the “option” that the UPS deal closes is only partially priced in. If the deal falls through, I think similar to Rhoen, there might be other groups interested in the business.
The risk is of course that some (very slow) hedge funds might sell if the deal finally falls thorugh but I assume that the 2.55 EUR difference to the bid price implies that most of the “Clever” merger arbitrage players are already out.
As a first summary, I will watch this and maybe start a 1% position in the next few days for my “special situation” bucket.
value and opportunity 