Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management


Merger Arbitrage Flies Higher On Sky Tailwind

01 Oct 2018

Investment Partners

September was overall a tough month for hedge funds. According to benchmark liquid indices, several strategies were down. L/S Equity and Macro/ CTA strategies underperformed on the back of sector rotations impacting negatively the former and higher bond yields and the US Dollar reversal impacting the latter.

There were some very bright spots however. Fixed Income Arbitrage managed to protect bond portfolios against the rise in bond yields which took place in the largest economies over the recent weeks. Meanwhile, Merger Arbitrage was fueled last week by Sky’s stock price rally (+8.6% on September 24th) after Comcast won the auction for the European pay-TV giant with a £30.6bn bid. The consolidation of the media industry has been a major contributor of performance for Merger Arbitrage strategies this year and remains a big focus for them. Driven partly by the dominance of Tech giants in the advertising space, large media groups are being forced to restructure at a fast pace to protect their market share.

Other significant transactions in merger arbitrage portfolios also include deals in the health care sector. The USD 56bn Express Script/Cigna vertical merger was cleared on September 17th by the DOJ. The decision translated into a tightening of the deal spread, which was partially reversed last week as the acquirer’s stock price rallied. The deal is expected to be completed by year-end, as it obtains clearances from departments of insurance in the states that have not yet granted it. Aetna/ CVS is another significant health care deal in merger portfolios though the recent spread widening detracted from performance after the NY Department of Financial Services expressed significant concerns with the transaction. Concurrently, there are also huge deals out of Japan. In particular, the USD 60.8bn Shire/Takeda proposed merger is the largest proposed deal worldwide at present.

Overall, we maintain strong convictions on Merger Arbitrage, which we keep at Overweight for Q4-18. In the U.S., the recent dealmaking spree brought M&A volumes in Q3-18 (USD 337bn) above the level reached during the same quarter last year. According to Thomson Reuters, megadeals (above USD 5bn in value) and cross border M&A represented a significant part of the activity. This is a fertile ground for the strategy.


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