December 21, 2012 3:49 pm
This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com
Welcome to The Morning Flash’s 2012 awards presentation, which doubles as a celebration of the year that was in event-driven investing. dealReporter’s Flash is a daily quick reaction report that combines a smart summary of key merger arb and special situations news with insight and commentary from our analysts and buyside sources. You can sign up by clicking here. The awards this year are pretty self-explanatory so without further adieu, we will dive right in.
Best Deal of 2012 - We are bending the rules a bit on this one by giving the award to a deal that was announced in November of 2011 but closed in January. That said, we simply could not ignore what a score Gilead Sciences (GILD) made in Pharmasset (VRUS). Since this deal closed, GILD shareholders are up 65%. Over the same period, Merck(MRK) is up 11%, Pfizer (PFE) is up 16%, Eli Lilly (LLY) is up 23% and Bristol Myers (BMY) is down 4%. Even Amgen (AMGN), which has been on a tear of late, is up just 30% since GILD closed on VRUS. Now those figures don’t include dividends. And admittedly, catalysts outside of VRUS may have helped GILD along the way. But a good deal of GILD’s outperformance can be traced back to VRUS and the promising Hepatitis C drug it acquired in that purchase. Adding luster to this deal is the fact that it was a white knuckler for arbs and was at one time quite unpopular with investors, particularly the morning of 17 February. Obviously, it is unpopular no more.
Worst Deal of 2012 – About the only good thing that can be said about Bristol-Myers’ (BMY) January purchase of Inhibitex (INHX) is the subsequent implosion wasn’t big enough to take down the buyer. But that is probably the only thing that distinguishes this deal from some of the all-time great blowups. It has been a while, so we will quickly detail this debacle. The purchase price was just over USD 2bn. The jewel was a promising drug that INHX designed to treat Hepatitis C. And the albatross was a post-deal drug study that left one person dead and eight in the hospital. Not surprisingly, that led BMY to toss the drug and take a USD 1.8bn impairment charge in August. Outside of the Dodgers acquiring Carl Crawford from Boston, there might not have been a worse acquisition in all of US commerce this year.
Shareholder Activist of the Year – The winner is Keith Meister from Corvex Management, who inarguably had a bang-up year in 2012. Here is a brief recap of Meister’s year in activism. First, Meister turned up the volume at AboveNet in February, demanding the company lever itself up, buy back shares and then conduct a sale. The company acceded by moving right to step three, selling itself to Zayo Group in March for about USD 2.2bn. Corvex then went “active” in Corrections Corp(CXW) in April just moments before the company announced it was considering turning itself into a REIT. Meister then showed up in Ralcorp(RAH) over the summer, wiggled his way onto the board, and had a hand in the company’s November sale to ConAgra (CAG) for USD 90. And finally, Meister made a move at home-security specialist ADT (ADT) that just this week turned into a board seat. From that perch, it figures Meister is well positioned to push the company to get more aggressive with its capital allocation. By our scoring, that is a double, a single, a home run and another double. Well done, Keith.
Best move by an activist in 2012 - This is a no-brainer as Carl Icahn’s strike against CVR Energy (CVI) has been a five-run grand slam that stands out for its audacity, its cunningness and the mountain of paper profits it has returned. Icahn bought 15% of CVI last winter when it was trading in the high teens. Subsequently, he was able to lift his stake above 80% though a USD 30 tender offer and various open market purchases. CVI closed at USD 49.49 on Thursday. Using Icahn’s regulatory filings as a guide and making some assumptions, we figure Icahn’s average price on his 70 million CVI shares is around USD 28. That means his mark-to-market profit in this name looks like it tops USD 1.4bn, take or give a hundred million. That is some serious coinage. Obviously, Icahn can’t bank that money, less taxes, until he sells CVI and that won’t happen until at least next fall, when he no longer has to pay a contingent value right to those who tendered him their shares at USD 30. But assuming good fundamentals in the mid-continent refining space continue for the time being and Icahn can get anything close to where CVI’s minority stake is trading, this trade will be remembered as a monster. This award represents redemption for Icahn as he won the 2011 award for “worst move by an activist” when he traded out of Lions Gate Entertainment (LGF) at USD 7, presumably before reading The Hunger Games.
The “White Knuckler” of the 2012 - The Express Scripts-Medco deal had some tense moments. As did the aforementioned GILD-VRUS deal. (And don’t forget Dollar Thrifty/Hertz Global Holdings.) But for sheer tension, nothing matched what arbs playing the Nexen (NXY) deal felt on the afternoon of 7 December. That, of course, was the day Canada was either going to bless NXY’s deal to be acquired by CNOOC or reject it. With plenty of potential upside and downside riding on the binary outcome, waiting for that decision must have been a stressful few hours for many of the world’s biggest merger arbitrage desks.
The “Zac Morris” Reverse Merger Award - There were only a handful of reverse mergers this year but the one that stands out is Tyco’s (TYC) move to combine its “flow” business with Pentair (PNR). This “Reverse Morris Trust” transaction caught everyone by surprise including bankers who were left wondering after the deal was announced why other flow control companies hadn’t thought of this. Those special situation types who had thought of it were up as much 20% on 28 March, the day this transaction was announced.
The “Big Tease” Award of 2012 - Warren Buffet talked all year about making a big deal and it never came. Remember, Buffet said back in May that he was very close to pulling the trigger on a USD 22bn deal, but it didn’t pan out. That led analysts everywhere to start running screens and sifting through old and current Berkshire filings for clues. Buffet then fanned the flames again in October when he told the world he was “salivating” to do a deal, particularly after he watched a second USD 20bn deal elude his grasp. It was also at this time that Buffet said he was recently approached on a USD 6bn deal that sparked his interest. So much deal-talk and yet so little to show for it. Let’s hope Buffet gets to show off his deal-making prowess in 2013.
The “Target Remorse” Award of 2012 - Does anyone out there think Avon Products (AVP) will trade for USD 24.75 in 2013? What about 2014? That question remains relevant today because the AVP board was presented in May with a USD 24.75 offer from Coty yet shares of AVP closed yesterday at USD 14.69. With those numbers in mind, the board’s decision set Coty’s overture aside does not look so hot. Now the bull case in AVP is its new CEO will be able to turn things around eventually and the stock could pop when the company finally settles the Justice Department’s bribery case. That said, there are probably plenty of investors today who wished the AVP board had reached for Coty’s wallet.
Best Conference Appearance of 2012 – Investors who were at Citigroup’s Media and Telecommunications conference last January may remember that this gathering gave Equinix (EQIX) CEO Steve Smith an opportunity to take his “REIT conversion” idea for a test drive. Now there had been some speculation in the second half of 2011 that EQIX would look good as a REIT, but Smith upped the ante at the Citigroup conference by signaling EQIX was giving very strong consideration to becoming a trust. At the time, EQIX was trading right at USD 100. Yesterday, it closed at USD 202. Reasonable minds might disagree but somewhere in there is about USD 50 that can be traced to Smith’s comment.
Worst Dutch Tender of the Year - This is a two-horse race. In lane number one is WebMD (WBMD), which in April spent USD 150m to buy back 5.8 million shares at USD 26. WBMD closed yesterday at USD 16.17. In lane number two is Weight Watchers International (WTW), which in March spent USD 720m to purchase 8.8 million shares at USD 82. WTW closed yesterday at USD 54.09. This is a close heat but WTW gets the edge because outside of the Dutch tender, it also spent USD 780m in April to buy back 9.5 million shares, at USD 82 per share, from its largest shareholder. That means it spent USD 1.5bn to buy stock that roughly nine months later was worth a little less than USD 1bn.
For more information or to inquire about a trial please email email@example.com or call Europe/EEMEA: +44 (0)20 7059 6160 Americas: +1 212 686-3076 Asia-Pacific: +852 2158 9714
Copyright The Financial Times Limited 2016. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.