Happy holidays everyone! Its coming to the end of the year and I believe everyone including me is winding down, preparing for the holidays and taking well deserved breaks. After the successful Brocade merger arbitrage trade and the disasterous Time Warner trade, I took some time made some cash adjustments to my portfolio, taking out cash, settling debts and resting my thoughts.
Now I am ready to start some merger arbitrage positions beginning with Monsanto and Fortress Investments as my two biggest trades recently. I am opptimistic about the chances of both closing in the year 2018. Of course I still have my half position in Time Warner and hopefully the courts will prevail for us. Of course hope can be a dangerous thing also and I will be careful not to over extend.
Now the main focus of this article is on the merger between Akorn Inc and Fresenius Kabi. On 24th April 2017, German generic drug company Fresenius Kabi announced that the company is aquiring Akorn Inc, another generic pharma company based in U.S. for $4.3 billion or $34 per share.
One of the main concern is that FTC may not approve the transaction based on anti-competitive concerns. I do not have the detailed analysis of the products of each company but I do think that Fresenius Kabi may need to divest some of its products which overlaps with Akorn's. However, I believe these will be relatively minor divestitures and will not adversely affect the benefits of the transaction for Fresenius Kabi.
Based on the charts above, overall Akorn's market share in the generic injectable is not very strong and should not pose a strong anti-competitive issue to the merger.
The above chart came from Fresenius Kabi's own presentation and it showed that the products of both companies are complementary and have little overlaps and anti-trust concerns. Although there is some delays and hiccups with the 2nd information request from FTC, I believe the merger will be approved by the FTC as soon as Feb 2018.
Fresenius Kabi remains fully committed to the merger although Akorn's recent results fell short of expectations. Fresenius Kabi also mentioned during their earnings conference call that the charges faced by Akorn's board member John Kapoor were not related to Akorn and should not affect the transaction. I believe that the odds of the transaction repricing is low and the chance of it falling apart is even lower as the merger is strategic for Fresenius Kabi's U.S expansion.
As of now, Akorn's share price is at $32.20 which is about 5% to the deal price of $34. By estimating an end of February 2018 closing about 77 days away, an investment in the equity can yield about 25% annualized.
Another alternative investment is to sell Jan 2018 $30 Puts at around $0.60 to $0.80 each. With each option margin of $500, then yield is about 15% in one month's time should the puts expire worthless. The options method is more efficient and has more margin of safety rather than the more straight forward equity investment. In the event the stock falls below $30, then our cost of investment per share will be $29.20 with the options method instead of $32.20 with equity method.
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