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Merger Arbitrage Opportunity with Akorn Inc.

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.

Information provided on this website is general in nature and does not constitute financial advice. Mergerpie.com do not guarantee the accuracy of information on the website, including information provided by third parties, at any particular time. Every effort has been made to ensure that the information provided is accurate.

Updated: December 19, 2017 — 8:15 am

9 Comments

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  1. Unless you are going long the $25 puts, realize that most firms probably have the margin requirement for AKRX at higher than the standard 20%.  At 50% requirement, it's almost tripled to $1500/contract.

  2. i am using IB. The equity (even CFD) is at 100%. The options are at 20% which i find contradicting… 

  3. I am also looking at Akorn to take a position.

    Why is Fortress Investments taking so long? The risk from CFIUS seems very low.

     

    1. Apparently Fortress had many investments in financial/property/infrastructure industry and some patents… I had just added a significant position in $FIG recently… hopefully we will get some guidance soon…  

      https://event-driven.com/figsftby-softbank-ties-china-heart-lengthy-cfius-review-fortress-telecom-assets-patent-portfolio/

      http://www.iam-media.com/Blog/Detail.aspx?g=e23c0d58-b156-41ef-b601-9f740c9ac39f

      http://www.iam-media.com/Blog/Detail.aspx?g=9797b0d0-bc6d-4ee6-9134-c3eaaa7733df

      1. Softbank merger with Fortress Investment is now completed. A merger with very little news…i was a bit surprised the merger was completed within this year… i thought earliest would be late Jan 2018.

  4. Does CFIUS need to aprove Akorn's merger to a Germany company?

    Selling a January put maybe a good if delays continue.

     

     

  5. It isnt Fresenius the dialysis German company.

     

  6. Sorry for all these short messages, it is part of the German company. If that is the case, should not CFIUS need to approve too?

    1. in the defm14a, there is no mention of cfius as one of the regulatory requirements so i assume fresenius kabi is not filing with cfius. 

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