Merger Arbitrage Commentary: As at December 31, 2023

The Picton Mahoney Fortified Arbitrage Alternative Fund Cl F returned 0.97%, and Picton Mahoney Fortified Arbitrage Plus Alternative Fund Cl F returned 1.41% in the fourth quarter of 2023.

The biggest driver of the funds’ returns this quarter was our position in Seagen Inc. (SGEN). This was a US$40BN acquisition by Pfizer Inc. that closed in December but traded with a very large spread for several reasons. Firstly, it was a large deal. We often feel we are overpaid for merger and acquisition (M&A) risk on large deals as we are earning a liquidity discount as well. Secondly, we’ve been through a tumultuous period for regulatory reviews of US mergers. A somewhat similar deal (Amgen acquiring Horizon Therapeutics plc) had been sued by the Federal Trade Commission (FTC) in the spring, although the regulator later abandoned the suit and the deal successfully closed. Arbitrage investors remain wary of the regulators and SGEN offered a 30%+ annualized rate of return to those willing to take on the risk. SGEN was our largest position coming into the quarter.

On the new deal front, the largest deals have been in the oil & gas space: Exxon Mobil Corporation announced its deal to acquire Pioneer Natural Resources in early October, followed by Chevron Corporation’s deal for Hess Corporation a couple weeks later. There has also been a large number of deals involving mature pharmaceutical companies acquiring early-stage drug programs. We’ve seen quite a bit of activity in biotech M&A. These tend to have wider spreads as they can come with the risk of negative data in clinical trials or safety events. These risks can be addressed in various ways through the merger agreement, but we tend to keep individual positions sizes small in biotech deals. At the other end of the risk spectrum, we’ve had two Canadian sub-receipts deals this quarter. Historically, these have had a very high probability of closing and low levels of expected loss if one were to tip over. While the potential returns reflect the low level risk, we find them to be a very attractive use of capital.

There were 9 Special Purpose Acquisition Companies (SPACs) issued this quarter, raising just over US$1BN. One notable de-SPAC was the announcement by Screaming Eagle Acquisition Corp. that they are acquiring Lionsgate’s studio business at a US$4.7billion valuation. This is a well-established and profitable business which has attracted a US$175mm PIPE (Private Investment in Public Equity) from a group of mutual funds. While there was no dramatic lift in the common shares upon announcement, this is the type of high-quality deal that helps to prove out the viability of the SPAC structure.

 

1M (%) 3M (%) 6M (%) 1YR (%) 3YR (%)* Since Inception*
Picton Mahoney Fortified Arbitrage Alternative Fund (Class F) 0.41 0.97 2.80 3.55 2.91 5.58
(Jan. 3, 2019)
Picton Mahoney Fortified Arbitrage Plus Alternative Fund (Class F) 0.77 1.41 4.68 4.51 4.66 10.00
(Jan. 3, 2019)
(*) refers to average annualized performance

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This material has been published by Picton Mahoney Asset Management (“PMAM”) on January 11, 2024

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