Wild Year in M&A Nears End as Risk Arbitrage Desks Hunt New Bets

(Bloomberg) -- Risk arbitrage investors got some early Christmas presents in the last few weeks with the closing of several of the year’s biggest deals, including United Technologies Corp.’s purchase of Rockwell Collins Inc. and CVS Health Corp.’s acquisition of Aetna Inc.

Heading into the second half it looked like M&A investors were getting a lump of coal after Qualcomm Inc. canceled its purchase of NXP Semiconductors NV in late July when China failed to give its blessing. Broadcom Inc. had already abandoned its bid for Qualcomm amid opposition from President Donald Trump. And investors were surprised when the Federal Communications Commission blocked Sinclair Broadcast Group Inc.’s purchase of Tribune Media Co. and the Department of Justice went to court to block AT&T Inc.’s bid for Time Warner Inc.

“What started out as a promising 2018 for mergers and acquisitions with respect to a Republican-controlled government offering deregulation and lower taxes, turned into something somewhat more challenging than expected,” Brett Buckley, event-driven strategist at WallachBeth Capital LLC, said in an interview. “The ensuing global political trade tensions helped to disrupt things. That, and an aggressive DOJ suing to block AT&T’s acquisition of Time Warner, turned 2018 into a roller coaster.”

To be sure, plenty of merger arbitrage investors still aren’t ready to pop corks. Avista Corp. holders got a surprise last week when Washington state regulators rejected Hydro One Ltd’s purchase, potentially a fatal blow. And those holding out hope that Fresenius SE would have to complete its purchase of Akorn Inc. were disappointed last week when an appeals court ruled in favor of Fresenius, sending Akorn shares down more than 30 percent over two days.

“2018 ended up seeing a number of deals that either outright, effectively or nearly failed many times more than is typical -- more than I can remember in a year going back likely since the financial crisis period of 2007-09,” Buckley said. “In a low interest rate environment, with less quality deals to trade than say pre-financial crisis times, that makes it that much harder for funds to recoup any single loss. So there has been a great deal of pain in the event-driven hedge fund space in 2018 for sure.”

Recent shareholder approvals for Takeda Pharmaceutical Co. to buy Shire Plc and for Dell Technologies Inc. to return to the public markets are also helping to end the year in better shape.

Several deals still remain outstanding including Cigna Corp’s purchase of Express Scripts Holding Co., Walt Disney Co.’s purchase of Twenty-First Century Fox Inc. assets, and Fresenius Medical Care AG’s acquisition of NxStage Medical Inc. Other deals yet to be completed include IBM’s plan to buy Red Hat Inc. and T-Mobile US Inc.’s purchase of Sprint Corp.

“With 21st-Century Fox and Shire nearing a close, I’d expect capital to be re-invested in certain spreads that are equally ‘safe’ and perhaps too wide,” Michael Samuels, an event-driven portfolio manager at Broome Street Capital, said in an interview. “Red Hat/IBM would be the most logical beneficiary. That said, in early 2019 attention should quickly return to T-Mobile and Sprint, which seems to be the most binary situation since Time Warner.”

Dominion Energy Inc.’s deal for Scana Corp., KLA-Tencor Corp.’s purchase of Orbotech Ltd and China Oceanwide Holdings Group Co.’s acquisition of Genworth Financial Inc., which was first announced in October 2016, are also still outstanding.

Scana investors may soon find out their fate. South Carolina regulators are scheduled to vote Friday whether to approve the Dominion deal. Express Scripts holders will have to wait until next year for a deal close after New York regulators delayed a public meeting on the deal until Jan. 10, and as New Jersey and California get set to weigh in.

Other lower-profile deals on traders’ radars include Vintage Capital Management’s purchase of Rent-A-Center Inc., which received an FTC second request in September. Tronox Ltd.’s $1.7 billion deal to buy the titanium-dioxide business of closely held Cristal received a setback recently when an administrative law judge ruled that the acquisition may substantially lessen competition.

Potential deals that have caught investors’ attention include Arconic Inc.’s speculated sale to private equity as well as potential sales of Nielsen Holdings Plc, Bunge Ltd, Mellanox Technologies Ltd., Jack in the Box Inc. and Caesars Entertainment Corp.

©2018 Bloomberg L.P.