John Paulson’s funds posted strong returns in June, especially on the back of merger arbitrage plays, an activity in which Paulson has been involved for the last 20 years. The best performer was Paulson Enhanced, a merger arbitrage fund, which inched up by 6% over June, and 11.8% between January and June, almost doubling the S&P 500 (INDEXSP:.INX)’s return of 6% for the first six months of 2014. Let’s take a look at two of his biggest arbitrage plays in order to better understand how he achieved such returns.
Mr. Paulson was (or is) involved in two of the three biggest M&A deals of 2014: AbbVie Inc (NYSE:ABBV)’s acquisition of Shire PLC (ADR)(NASDAQ:SHPG), and Comcast Corporation (NASDAQ:CMCSA)’s purchase of Time Warner Cable (NYSE:TWC).
The biggest transaction this year –so far- is that of AbbVie Inc (NYSE:ABBV), which has recently reached a deal to acquire Shire PLC (ADR)(NASDAQ:SHPG) for about $54 billion; and Mr. Paulson’s fund has largely benefited from this. Shire’s stock jumped by 66.7% over the first six months of the year, and 82.3%, year-to-date, and Paulson currently owns about 2.53 million shares of the company, worth more than $650 million at the current stock price.
In a recent interview with Melissa Lee, in the context of the CNBC Institutional Investor Delivering Alpha conference, Mr. Paulson said:
“[…]We did identify Shire last year as a potential takeover target. They were a midsized, mid cap pharma company growing fairly rapidly with an Irish domicile. So that made them very attractive for several potential U.S. pharmaceutical companies. So once Valeant made the bid for Allergan, then rumors surfaced that perhaps Allergan could be interested in acquiring Shire. And then last month it was revealed that AbbVie, which was a spinoff from Abbott, so about $90 billion market cap pharma company, had made three bids in June for Shire that were rejected by Shire. But subsequently this month they made a fourth and a fifth bid (…) So that ultimate price, believe it or not, is about a 90 percent premium to where Shire traded prior – immediately prior to Valeant made its original recent bid for Allergan.”
The second largest merger/acquisition this year is AT&T Inc. (NYSE:T)’s bid for DIRECTV (NASDAQ:DTV). However, Paulson is not involved in this one. Third in line is another merger arbitrage play in which Paulson is involved: Comcast Corporation (NASDAQ:CMCSA)’s purchase of Time Warner Cable (NYSE:TWC). The first company will acquire 100% of the second’s 284.9 million shares outstanding. The value of the all-stock deal amounts to approximately $45.2 billion in equity value.
Although Time Warner Cable (NYSE:TWC)’s stock has outperformed the S&P 500 index, its growth has been somewhat modest. Still, it has contributed to the overall performance of Paulson’s fund. Over the first six months of 2014, the stock price rose 8.7%; year-to-date, 9.45%.
Time Warner Cable (NYSE:TWC) is Paulson’s fourth largest equity position. His fund owns about 5.97 million shares of the company, worth roughly $886 million at current stock prices.
More recently, Twenty-First Century Fox Inc (NASDAQ:FOX) made a $76 billion bid for Time Warner Cable (NYSE:TWC), seeking to counter the consolidation amongst U.S. TV distributors. Regarding this issue Mr. Paulson stated:
“There’s a limit to how much Fox could ultimately pay for Time Warner. So we’re not going to see a very rapid type of bidding we saw in Shire, where the premium ultimately was 90 percent above the unaffected price, or in Hillshire we had two very large bidders bidding for small asset that was both very strategic to them, where the ultimate price was also around 80 to 90 percent higher than where Hillshire traded initially. When you’re the same size, there’s a limit to how much cash you can pay, and there’s also a limit to how much stock you can provide before it becomes diluted to the acquirer’s stock and the stock goes down.”
Disclosure: Javier Hasse holds no position in any stocks or funds mentioned