Klarman’s Baupost to Gain More Than $900 Million on Deal

Baupost Group LLC, the Boston-based hedge-fund firm run by Seth Klarman, stands to make a paper profit of more than $900 million today after Merck & Co. agreed to pay a record premium for a big health-care deal with its acquisition of Idenix Pharmaceuticals Inc.

Merck will pay $3.85 billion, or $24.50 a share, in cash for Idenix, which closed June 6 at $7.23, translating into gains for Baupost assuming the hedge-fund firm’s stake in the company hasn’t changed. Baupost owned 35 percent, or 53.3 million shares, of the Cambridge, Massachusetts-based maker of hepatitis C treatments as of March 31, making it Idenix’s largest shareholder, according to data compiled by Bloomberg.

Klarman, 57, whose firm managed $27 billion at the start of this year, is a bargain hunter who wrote the preface to the sixth edition of “Security Analysis,” a landmark 1934 book by Benjamin Graham on value investing. He joins managers such as Carl Icahn, Warren Buffett and John Paulson in benefiting from $1.2 trillion in pending or completed mergers and acquisitions so far this year, a 61 percent increase from the same period in 2013, according to data compiled by Bloomberg.

Icahn, Buffett

Billionaire Icahn owned 11 percent of Forest Laboratories Inc. when it agreed in February to be acquired by Actavis Plc for about $25 billion, handing him a gain of almost $1.7 billion at the time the deal was announced. Buffett’s Berkshire Hathaway Inc., the second-largest holder of DirecTV, was a winner when AT&T Inc. in May agreed to buy the company for $48 billion.

Paulson, the hedge-fund manager who is profiting with bets on merging companies, had a gain of about $140 million in February when Time Warner Cable Inc. agreed to be bought by Comcast Corp. The Paulson Partners Enhanced fund, a merger-arbitrage strategy that uses leverage to amplify gains, rose 4.8 percent this year through May, according to a person familiar with the matter said last week.

Merck’s purchase price represents a record premium for health-care deals larger than $100 million, the data show. Buying Idenix will help Whitehouse Station, New Jersey-based Merck in the race to develop a daily, all-oral regimen to treat hepatitis C. The regimen treats different strains of the viral infection and doesn’t include ribavarin, a standard treatment that has serious side effects.

Diana DeSocio, a spokeswoman for Baupost, declined to comment on the Idenix takeover.

Lehman Holdings

Baupost in recent years has held a relatively small share of its money in stocks, preferring less liquid assets such as real estate and distressed debt. Investments in debt of Lehman Brothers Holdings Inc. represented 18 percent of Baupost’s net asset value as of Dec. 31, 2013, according to Klarman’s year-end letter to shareholders.

In the letter, he wrote that, “on almost any metric, the U.S. equity market is historically quite expensive.”

“A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality and yields, not to mention the nosebleed stock valuations of fashionable companies like Netflix and Tesla,” Klarman wrote in the letter.

Baupost largest U.S. stock holding as of March 31 was Boise, Idaho-based Micron Technology Inc., according to regulatory filings. Micron, which makes semiconductors, has gained 34 percent this year.

Cash represented almost 40 percent of Baupost’s holdings at the end of 2013, even after the firm returned about $4 billion to clients last year. Like other value investors, Klarman is willing to hold cash when he cannot find enough things to buy. Since it was founded in 1983, Baupost’s main fund has returned about 17 percent a year, compared with 11 percent for the Standard & Poor’s 500 Index.

“We prefer the risk of lost opportunity to that of lost capital,” he wrote in a 2004 letter to shareholders.

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