(Bloomberg) -- Merger-arbitrage investors are betting on just a small handful of deals in the third quarter, including potential acquisitions of R1 RCM Inc. and Macy’s Inc., after a rough start to the year, with regulatory, legal and political hurdles delaying or outright quashing big deals.
That’s the finding from a Bloomberg News survey of 12 merger-arbitrage and event-driven analysts, brokers and fund managers who said they are especially cautious ahead of the US presidential election in November.
“I think the election could be a major factor, if not the biggest factor at this point. A Republican administration would probably be softer on antitrust,” said Frederic Boucher, a merger arbitrage specialist at Susquehanna International Group. “So I expect the third quarter would be a bit ‘wait and see’ for companies contemplating deals.”
However, there are a few transactions in the spotlight among this group of investors because they are pending or have been reported in the press. Among them are R1, Macy’s, Instructure Holdings Inc. and a couple of large deals that have been tied up in court.
So far, though, this year has been a terrible one for merger-arbs. The strategy gained just 0.4% in the first five months of 2024 — the worst performance among hedge fund strategies, according to the latest data from a Bloomberg index that tracks the industry.
In ordinary times, merger arbs have dozens of deals to wager on, but since an M&A drought began in 2021 it has been slim pickings. Although M&A activity was up 14% in the first half of the year, it’s still far below the 10-year average, as transactions are either taking longer to complete or being scrapped entirely.
R1 RCM, a health-care technology firm, is considered the most likely candidate for a third-quarter acquisition, according to 10 of the 12 respondents polled from July 8 to July 15. They cited the ongoing bidding war between the firm’s two large shareholders as the main driver.
In recent weeks, New Mountain Capital and TCP-ASC have been weighing take-private proposals for the health-care technology firm, after their joint bid fell apart. New Mountain, which owns more than 30% of R1 RCM, revised its offer to $13.25 per share, while TCP-ACS said it’s in the process of finalizing a higher bid. The stock is now trading at around $13.
Macy’s was the second-most popular pick, although the retailer’s rejection of a buyout proposal on Monday leaves its fate uncertain.
One theme on survey respondents’ radar is the rise of take-private transactions, particularly around companies that count private equity firms as major holders. Respondents cited education-software provider Instructure as a likely target. Francisco Partners and KKR were among suitors circling the company, valuing it about $3.4 billion, as Bloomberg News reported earlier this month.
They are also expecting decisions in the coming months regarding the $24.6 billion merger between rival grocers Kroger Co. and Albertsons Cos., as well as Tapestry Inc’s takeover of fellow handbag-maker Capri Holdings Ltd. Both are facing challenges from the Federal Trade Commission. The outcomes — whether the companies or the regulator prevail — will swing investors’ returns and their views on the regulatory landscape in a big way. Last year, many of them reaped a windfall after successfully wagering that the FTC’s attempt to block deals would fall short.
Other large-ticket transactions ran into major roadblocks earlier this year. For example, the Biden administration has voiced stiff opposition to Nippon Steel Corp.’s $14 billion acquisition of US Steel Corp. The $53 billion combination of Chevron Corp. and Hess Corp. threw up some nasty surprises, as rival Exxon Mobil Corp initiated arbitration that won’t conclude until the fourth quarter at the earliest.
Even so, investors are hoping a turnaround will come when conditions become more favorable for dealmaking. Plus, there is always the potential for hostile and opportunistic bids that come as a surprise.
That “creates an upside opportunity for arbitrage trading,” TIG Advisor’s Drew Figdor said in an interview last month.
(Updates throughout.)
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