Menu

Tag Archives: Merger Arbitrage

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 Elliotts 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 Elliotts convertible bonds. Other convertible bondholders received the equivalent of €23.50 a share.

We believe McKessons 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 wouldnt 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 dont 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 dont 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.

Celesio why merger arbitrage is hard business

Lets start with a few quotes from yesterdays 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.”

Lets 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 ?

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)