Merger Arbitrage Commentary: As of September 30, 2024

The Picton Mahoney Fortified Arbitrage Alternative Fund Class F returned 0.92%, and the Picton Mahoney Fortified Arbitrage Plus Alternative Fund Class F returned 1.29% in the third quarter of 2024.

It was another steady quarter for the arbitrage strategy, which has been positive for 16 consecutive months1. Our arbitrage alpha this year has come from avoiding excessive risk in an environment where risky arbitrage situations have largely not paid off. This was evident in the third quarter, as we observed the Albertsons-Kroger and Capri-Tapestry merger challenge trials largely from the sidelines.

While the Albertsons-Kroger and Capri-Tapestry’s antitrust trials have made headlines, the Biden antitrust crusade remains largely unsuccessful. The Federal Trade Commission (FTC) had its blanket ban on non-compete agreements overturned in one court and also lost the “Chevron deference” doctrine in the Supreme Court. The Albertsons-Kroger merger challenge is not surprising, as it involves direct competitors with high regional concentration in a politically sensitive industry, along with an unproven divestiture buyer. The Capri-Tapestry challenge is a bit more aggressive, with the FTC failing to define a clear market where Coach and Capri’s Michael Kors dominate. Regardless, we view both merger challenges as “normal course”—i.e., they might have happened under any administration—unlike the “hipster antitrust” novel arguments we saw last year (challenging mergers where the two parties don’t even compete directly).

Several significant deals were announced this quarter with attractive risk-adjusted arbitrage spreads. The largest deal of the year, Mars Inc. acquiring Kellanova (the post-spin Kellogg’s) for US$35 billion, was announced in August. This is a large and relatively straightforward deal, with an estimated 9% annualized rate. We also find the US$8 billion private equity purchase of Smartsheet Inc. by Vista Equity Partners and Blackstone Inc., announced in September, to be similarly attractive.

The U.S. election looms large for merger arbitrageurs, as the FTC and Department of Justice risks have been at the forefront of the strategy for the last four years (three years since Lina Khan’s appointment). Putting aside all other political considerations, a Trump administration would likely be favorable for merger arbitrage strategies, as we would expect changes in leadership and ideology among U.S. antitrust enforcers. The Harris policy platform remains incomplete, but we believe she would also be an improvement over Biden, given her California/Big Tech ties and the fact that her large donors are calling for a less hostile approach to business interests at the FTC.

The Special Purpose Acquisition Company (SPAC) new issue market continued to pick up, with 18 initial public offerings raising US$3.3 billion in the quarter. While it’s encouraging to see new SPACs coming to market, there has been a lack of successful de-SPAC business combinations, and as such, warrant values remain depressed. We feel the market’s appetite for new SPACs has largely been satisfied for now.

As we reflect on the past few years of the Biden administration and contemplate what the upcoming U.S. election might mean for the merger arbitrage strategy, we are pleased that the funds have outperformed the broad fixed income market over this period. However, we are hopeful that the next administration ushers in a new era of greater opportunity, driven by increased merger and acquisition activity.

 

1 Picton Mahoney Fortified Arbitrage Alternative Fund, as of September 30, 2024.
This material has been published by Picton Mahoney Asset Management (“PMAM”) as at October 8, 2024. It is provided as a general source of information, is subject to change without notification and should not be construed as investment advice. This material should not be relied upon for any investment decision and is not a recommendation, solicitation or offering of any security in any jurisdiction.
This material may contain “forward-looking information” that is not purely historical in nature. These forward-looking statements are based upon the reasonable beliefs of PMAM as of the date they are made. PMAM assumes no duty, and does not undertake, to update any forward-looking statement. Forward-looking statements are not guarantees of future performance, are subject to numerous assumptions and involve inherent risks and uncertainties about general economic factors which change over time. There is no guarantee that any forward-looking statements will come to pass. We caution you not to place undue reliance on these statements, as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made.
Commissions, trailing commissions, management fees, performance fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Alternative mutual funds can only be purchased through a registered dealer and are available only in those jurisdictions where they may be lawfully offered for sale.
There is no guarantee that a hedging strategy will be effective or achieve its intended effect. The use of derivatives or short selling carries several risks which may restrict a strategy in realizing its profits, limiting its losses, or, which cause a strategy to realize or magnify losses. There may be additional costs and expenses associated with the use of derivatives and short selling in a hedging strategy.
This material is confidential and is intended for use by accredited investors or permitted clients in Canada only. Any review, re-transmission, dissemination or other use of this information by persons or entities other than the intended recipient is prohibited.
© 2024 Picton Mahoney Asset Management. All rights reserved

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This material has been published by Picton Mahoney Asset Management (“PMAM”) on October 8, 2024

It is provided as a general source of information, is subject to change without notification and should not be construed as investment advice. This material should not be relied upon for any investment decision and is not a recommendation, solicitation or offering of any security in any jurisdiction. The information contained in this material has been obtained from sources believed reliable, however, the accuracy and/or completeness of the information is not guaranteed by PMAM, nor does PMAM assume any responsibility or liability whatsoever. All investments involve risk and may lose value. This information is not intended to provide financial, investment, tax, legal or accounting advice specific to any person, and should not be relied upon in that regard. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.

This material may contain “forward-looking information” that is not purely historical in nature. These forward-looking statements are based upon the reasonable beliefs of PMAM as of the date they are made. PMAM assumes no duty, and does not undertake, to update any forward-looking statement. Forward-looking statements are not guarantees of future performance, are subject to numerous assumptions and involve inherent risks and uncertainties about general economic factors which change over time. There is no guarantee that any forward-looking statements will come to pass. We caution you not to place undue reliance on these statements, as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made.

Commissions, trailing commissions, management fees, performance fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Alternative mutual funds can only be purchased through a registered dealer and are available only in those jurisdictions where they may be lawfully offered for sale.

There is no guarantee that a hedging strategy will be effective or achieve its intended effect. The use of derivatives or short selling carries several risks which may restrict a strategy in realizing its profits, limiting its losses, or, which cause a strategy to realize or magnify losses. There may additional costs and expenses associated with the use of derivatives and short selling in a hedging strategy.

This material is confidential and is intended for use by accredited investors or permitted clients in Canada only. Any review, re-transmission, dissemination or other use of this information by persons or entities other than the intended recipient is prohibited.

© 2024 Picton Mahoney Asset Management. All rights reserved.