Stock-Market Euphoria Threatens $170 Billion Takeover Wave

(Bloomberg) -- The global market euphoria is threatening to unravel some of the recent flurry of dealmaking.

More than $170 billion of listed company takeovers were agreed worldwide in the month leading up to Pfizer Inc.’s Nov. 9 announcement of its successful vaccine trials, according to data compiled by Bloomberg. The subsequent stock rally has made many of the deals just struck look suddenly less generous.

Targets in $23 billion of those deals are now trading above their bids, indicating investors may expect a bump or competing offer. The coronavirus crisis is “blurring the lines between consolidation and opportunism,” said Josh Rosen, a special situations analyst at United First Partners.

“The tide is coming in for acquirers who launched mediocre offers mid-pandemic,” Rosen said. “Why should target shareholders acquiesce to unadjusted equity valuations, modeled in the midst of the worst pandemic in living memory?”

Lone Star Funds raised its bid for British retirement community developer McCarthy & Stone Plc to 647 million pounds ($860 million) on Monday, giving in to investor opposition just hours before they vote on the deal. The initial offer looked “too cheap” after a re-rating of the sector, Massimo Stabilini, a former Paulson & Co. executive who runs hedge fund Sinclair Capital, said last week.

The private equity firm’s original proposal of 115 pence per share represented an above-average 39% premium to McCarthy & Stone’s last close at the time it was announced. That spread was quickly erased: the stock has been trading slightly above the proposal and ended Friday at 115.80 pence.

Lone Star has now increased the offer to 120 pence per share, and the shareholder meeting will be held Monday afternoon as planned, it said in a statement.

‘Grand Theft Auto’

Other targets trading above pending takeover offers include London-listed copper miner KAZ Minerals Plc, the subject of a $2.4 billion buyout proposal from its biggest shareholder. A group of opposing investors led by Maxim Vorobyev, who own 3.6% of the company, said the bid is trying to “take advantage” of declines in KAZ’s stock due to Covid-19 and doesn’t reflect its growth potential.

James Johnstone, a fund manager at fellow dissident shareholder RWC Partners Ltd., said that vaccine developments and the election of Joe Biden to the U.S. presidency “have materially boosted global asset prices” since the offer came out. KAZ shares closed Friday at 661.80 pence, or 3.4% above the offer of 640 pence per share.

“Boards of companies in definitive deals to be acquired do have to weigh the continued significant stock market appreciation relative to the deal they signed at the time,” said Brett Buckley, an event-driven strategist at WallachBeth Capital LLC.

Take-Two Interactive Software Inc., the maker of “Grand Theft Auto,” has also faced opposition to its roughly $1 billion bid for British game studio Codemasters Group Holdings Plc. The cash and stock proposal’s value has fluctuated over time, and as of Friday’s close it translated into more than a 2% discount to Codemasters’s share price.

Columbia Threadneedle Investments has argued the takeover doesn’t value Codemasters as high as its listed peers. Katie Cousins, an analyst at Shore Capital Group Ltd., said the U.K. developer has a “unique position in the market” and there’s a risk shareholders reject the deal given the “lack of a material control premium.”

Representatives for KAZ and Codemasters declined to comment, while a spokesperson for Take Two didn’t immediately respond to a request for comment.

Still, the risk of a deal successfully being blocked is lower as merger arbitrage funds don’t have the will to pursue those strategies after such a stressful year, said Andrew Ross, a managing member of Confluence Global Capital.

“I don’t think arbs are going to mess with fate at this point,” Ross said. “You are not going to gain the critical mass to vote down a deal.”

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