Greenlight Sees Mallinckrodt Short as Cheap Debt Fuels Deals 

Greenlight Capital Inc., the hedge-fund firm run by David Einhorn, said it sees an opportunity to bet against Mallinckrodt Plc should its takeover of Questcor Pharmaceuticals Inc. (QCOR) be completed.

The deal, announced in April, illustrates how cheap financing is fueling a surge in takeovers even of troubled companies, the New York-based hedge-fund manager said today in a second-quarter letter to investors, a copy of which was obtained by Bloomberg News. Greenlight, which was betting against Questcor and lost money when the shares rallied 42 percent in the quarter, said Mallinckrodt is “blowing smoke” over the problems facing Questcor’s main drug.

Financing costs near record lows are making acquirers willing to overlook problems they discover, Greenlight wrote. The value of U.S. deals has risen to about $816 billion so far this year, doubling from a year earlier. Several of the companies the hedge fund was betting against, including Safeway Inc. and Martin Marietta Materials Inc. (MLM), gained after becoming takeover targets or acquiring a rival.

“Takeover season has returned and in a new twist, the buyers’ stock prices are also advancing in response to announced deals, enabling companies, including some of our shorts, to see gains as acquirers -- even of other troubled companies,” Greenlight wrote in the letter.

Photographer: Scott Eells/Bloomberg

Greenlight Capital Inc. President David Einhorn. Close

Greenlight Capital Inc. President David Einhorn.

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Photographer: Scott Eells/Bloomberg

Greenlight Capital Inc. President David Einhorn.

‘Significant’ Loser

The Greenlight Capital funds rose 7.9 percent in the second quarter, helped by gains in Micron Technology Inc. and Apple Inc. Questcor was its “only significant” loser in the quarter, the firm said, as the stock rose from $64.93 to $92.49. The funds are up 6.4 percent this year.

Greenlight has been betting against Questcor, saying there are concerns regarding its main product, H.P. Acthar Gel, the firm wrote in the letter. In February, Questcor’s shares plunged 23 percent over three days after a report questioned the quality of the drug. Mallinckrodt (MNK) on April 7 agreed to buy the company for $5.6 billion.

Mallinckrodt “is setting itself up to be a very attractive short-sale candidate if the merger is completed,” Greenlight wrote.

Mallinckrodt and Questcor declined to comment.

Mallinckrodt fell 2.9 percent to close at $74.37 in New York, reversing earlier gains. Questcor declined 2.1 percent to $94.90, after earlier rising as much as 0.9 percent.

Safeway’s Liability

Greenlight bet against Safeway in part because of the supermarket chain’s off-balance sheet liability to multi-employer pension plans, which it estimates at about $8 billion, according to the letter. Cerberus Capital Management LP agreed in March to merge Safeway (SWY) with its Albertsons chain at the industry’s lowest valuation in almost a decade.

Similarly, the market chose to ignore Martin Marietta Materials’ history of missing earnings forecasts, sending the shares up after the producer of aggregates for the construction industry agreed to purchase Texas Industries Inc. for $2.7 billion in January, Greenlight wrote.

Greenlight said it established a new long position in Lam Research Corp (LRCX), a maker of semiconductor equipment that it believes will benefit from chip manufacturers buying more of the company’s tools as transistors continue to become smaller, and the implementation of designs becomes more difficult.

To contact the reporter on this story: Kelly Bit in New York at kbit@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net Pierre Paulden, Sree Vidya Bhaktavatsalam

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