Hedge Funds Strike Paydirt on Actelion Deal After Tracking J&J's Jet

  • Bet on pharma takeover boosts Och-Ziff, Eton Park, Elliott
  • Event-driven investors aim to put 2016 troubles behind them

J&J Acquires Actelion for $$30 Billion

Burned by failed deals, poor returns and client withdrawals, hedge fund managers needed a home run.

With each passing day last week, as a Johnson & Johnson corporate jet remained mostly parked a short drive from Actelion Ltd. headquarters near Basel, Switzerland, they grew increasingly confident of a big score, according to hedge fund managers betting on the deal who tracked the plane’s movements on the Internet.

They struck paydirt Thursday when J&J agreed to buy Actelion for $30 billion, sending the drugmaker’s shares soaring almost 20 percent -- 44 percent the past six weeks. Och-Ziff Capital Management Group LLC had built a stake worth about 767 million Swiss francs ($766 million), according to a filing on Dec. 24. Eton Park Capital Management’s bet was almost $500 million and Elliott Management Corp.’s $200 million, according to people with knowledge of the matter. Spokesmen for Och-Ziff, Eton Park and Elliott declined to comment.

“The deal has been a strong conviction bet," said Philippe Ferreira, head of research at Lyxor Asset Management in Paris, which invests in hedge funds. Hedge funds "have been invested for a couple of months now."

Actelion was one of the top-five long bets for hedge funds speculating on the success or failure of mergers and acquisitions, according to Lyxor. Several managers have allocated 5 percent to 10 percent of their assets to the deal.

They backed up their belief with some virtual shoe leather, tracking the movements of the J&J Gulfstream since it touched down on Jan. 15 at EuroAirport Basel Mulhouse Freiburg, the people said, asking not to be identified as they were not authorized to speak to the media. The monitoring underscored the effort by hedge funds to gain an information edge in a world awash with news and data.

Private Jet

It was the jet’s first flight to the Swiss city in at least three months, according to data compiled by FlightAware. The aircraft mainly didn’t move -- save a trip to Antwerp -- before leaving on Tuesday morning.

Hedge funds are known to follow weather patterns, hire people to count delivery trucks coming out of a factory or send analysts to study the body language of a chief executive. Chasing the movement of an aircraft marks yet another unconventional approach as they struggle to outperform equity markets.

Speculating on M&A is becoming harder and investors are deserting hedge funds focusing on corporate transactions. More than $1 trillion in deals fell apart last year, on top of about $960 billion that collapsed in 2015, according to data compiled by Bloomberg. Event-driven hedge funds suffered $38.5 billion in withdrawals last year, the most of any strategy, according to data from eVestment.

Strategies focusing on deals gained 3.7 percent last year, trailing an average 5.5 percent return in broader hedge funds, as they were hit when some high-profile deals collapsed.

Failed Deals

Pfizer Inc. and Allergan Plc terminated their $160 billion merger in April, bringing an abrupt end to the record health-care acquisition as officials in Washington cracked down on tax-driven deals. Halliburton Co. and Baker Hughes Inc. also called off a $28 billion merger that faced resistance from antitrust regulators.

The scramble for an Actelion takeover echoed hedge funds’ bets that talks between AbbVie Inc. and Shire Plc in 2014 would result in a merger. They didn’t.

The Actelion bet was safer, two hedge fund managers involved in the deal said. One reason its stock surged close to the offer price of $280 on Thursday was investors’ confidence that the deal had a high probability of success because of the buyer’s commitment and the lack of regulatory hurdles, they added.

"Its been a very attractive opportunity for us," said Jason Dillow, chief investment officer of Halcyon Capital Management, which manages $9.3 billion. Halcyon started betting on Actelion in November, when the stock was trading at about $180 a share. Dillow said the stock still offers more than 8 percent upside on an annualized basis until the transaction closes.

Investors will also benefit from Actelion’s plan to spin out its drug discovery operations and early-stage clinical development assets into a new company. Shares of the firm will be distributed to Actelion’s holders as a stock dividend.

The new company could be worth about $1 billion to $2 billion, Klara Fernandes, an analyst at Berenberg Bank, wrote in a note to clients. Its cash and more advanced drugs in development could be worth about 14 to 20 Swiss francs a share, based on a back-of-the-envelope calculation, said Peter Welford, an analyst at Jefferies LLC.

“The reason why this is taking place is it gives the exiting management a firm to run," Dillow of Halcyon Capital said. “It’s less about economics and much more about people and transaction dynamics."

The spinoff is another chance for hedge fund managers to juice their returns from one of their most successful bets this decade.

— With assistance by Hema Parmar, Ed Hammond, Aaron Kirchfeld, Naomi Kresge, James Paton, and Roxana Zega

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