Hedge funds Pentwater Capital Management, HBK Investments and Farallon Capital Management are reaping a windfall from bets that US regulators wouldn’t be able to stop Amgen Inc. from completing its $28 billion takeover of Horizon Therapeutics Plc.
(Bloomberg) — Hedge funds Pentwater Capital Management, HBK Investments and Farallon Capital Management are reaping a windfall from bets that US regulators wouldn’t be able to stop Amgen Inc. from completing its $28 billion takeover of Horizon Therapeutics Plc.
The deal closed Friday, leaving Pentwater with a $1.8 billion stake in Horizon, based on the 15.5 million shares it had amassed, the most among hedge funds and second only to Vanguard Group Inc. overall, data compiled by Bloomberg show.
The Illinois-based money manager stands out for the bold timing of its decision to boost its holdings, with a net purchase of around 2.1 million Horizon shares, on May 16, the day the Federal Trade Commission sued to block the transaction. It was the FTC’s first lawsuit to stop a pharmaceutical deal since 2009, and it caused the stock to tumble to its lowest since the merger announcement in December.
Merger-arbitrage investors, who bet on the likelihood that proposed acquisitions will close, have gone through a wild ride this year. FTC Chair Lina Khan has pursued an aggressive trustbusting agenda, threatening to derail some of the largest corporate combinations, spanning industries from healthcare to technology. Her efforts have added to the risk of wagering on those transactions, while opening up a window for traders with conviction in their positions.
Read more: Lina Khan Is Upending Wall Street’s Merger-Arbitrage Playbook
Under takeover rules in Ireland, where Horizon is registered, investors who own 1% or more of a target company have to disclose when their ownership changes.
Pentwater paid from $91.94 to $94.08 per share on May 16, compared with the deal price of $116.50, the disclosure data show. It was the firm’s biggest single-day purchase of Horizon shares after their initial stake. It also bought shares May 15, when media reports of a potential FTC lawsuit emerged. The trade paid off a few months later when the FTC allowed the merger to proceed. That chunk of shares delivered a gain of roughly $52 million, or 25%, on paper, according to a Bloomberg analysis.
“We believed that the transaction would close because the FTC did not have a valid objection,” Matt Halbower, Pentwater’s chief executive, said in an interview this week.
“We thought that there was not any antitrust issue, which is why we owned the stock” before the FTC’s suit, he said. “And then of course the stock fell and it became a super-attractive purchase because we believed the FTC would not prevail.”
Stay the Course
Pentwater was among a number of funds that stuck with their bets throughout the monthslong antitrust saga.
Dallas-based HBK Investment and San Francisco-based Farallon Capital Management remained large holders the whole time, with 8 million and 6.7 million shares, respectively, the latest filings data show.
In the weeks following the FTC’s move to block the deal, Farallon boosted its stake and HBK added a small amount, data compiled by Bloomberg show. While they endured volatility and mark-to-market losses on positions when the FTC sued, their patience paid off.
Farallon declined to comment, while HBK didn’t respond to telephone calls and emails seeking comment.
The regulatory overhang also highlighted the need for the funds to hedge against the risk that the deal would fail, spurring Pentwater and others to deploy options strategies as protection, data compiled by Bloomberg show.
The FTC’s approach has forced investors to devote significant resources to analyzing legal proceedings. For Microsoft Corp.’s takeover of Activision Blizzard Inc., hedge fund managers and analysts piled into a San Francisco courtroom to follow the hearing in person. By the end, a consensus emerged among them that the FTC was unlikely to succeed in its effort to block the deal, which is expected to close this month.
Investors were predicting a similar outcome for the Amgen-Horizon tieup, and the turnaround came before an injunction hearing scheduled in September.
In late August, the FTC paused its in-house proceedings to open the door to settlement talks, driving the stock back above $112. And within days, it allowed the deal to move ahead after the companies promised not to bundle their offerings, pushing the stock up to $116.
–With assistance from Brad Skillman, Denise Cochran and Ben Scent.
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