Concentrated Merger Arbitrage Funds – Q1 2025 Update
This is our seventh update about new merger arbitrage related positions at funds that tend to have concentrated portfolios. You can find our first update here and our Q4 2024 update here. I mentioned the following in our Q3 2024 update about the number and kind of funds I am tracking:
“This has been a challenging year for merger arbitrage with multiple widely followed deals like Capri (CPRI) failing. Beyond the hit to my personal portfolio, I also saw the impact on the professional investors I follow who focus on risk arbitrage. When I first started this series of articles, I was tracking eight funds but one of them closed shop and I am dropping one more this quarter because their portfolio is more diversified and not concentrated in their top 10 positions. A third fund saw their concentration in the top 10 positions drop to 46% but I am going to retain them for now.
I am also starting to see increased reliance on options to either hedge positions or juice returns as well as some style drift. One of them started a new position in Vestis (VSTS), the company that was spun out of Aramark, although to be fair there was a rumor in September that Vestis might get acquired.”
There are currently 68 active M&A situations in the U.S. ranging from highly risky deals like the $627 million acquisition of Surmodics (SRDX) by the private equity firm GTCR that is trading at a spread (potential profit) of nearly 45% to the acquisition of Regulus Therapeutics (RGLS) by Novartis (NVS) in an $800 million deal, which is trading at a negative spread of nearly 12% on the $7 per share cash acquisition price. The negative spread is because Regulus is trading at $7.95 per share to account for the additional $7 per share contingent value right (CVR) attached to the deal.
A Massive Bet Against the Market
The largest of the six funds I am tracking had a massive $2.5 billion bet against the overall market in the form of SPDR S&P 500 ETF (SPY) put options at the end of Q1 2025 that represented almost 21% of their 13-F portfolio. Considering how things played out in April, they probably ended up locking in some excellent gains if they scaled back this position. This was not a new position for them but they doubled down on their bearish view by adding significantly to their short exposure in Q1 2025. They also had a long position in SPY but that position was scaled down in Q1 to less than 3% of the portfolio.
New Additions
I am going to focus on some of the new additions across the six funds I am tracking. The funds continue to use options to either protect downside or juice returns on the upside. I also saw more pre-deal activity in Q1 2025. I am excluding deals like the acquisition of Intra-Cellular Therapies (ITCI) by Johnson & Johnson (JNJ) or the acquisition of Beacon Roofing Supply (BECN) by QXO that several of these funds had a position in but that closed shortly after the end of Q1 2025.
The $5.66 billion acquisition of H&E Equipment Services (HEES) by Herc Holdings (HRI) for $78.75 per share in cash and 0.1287 shares of Herc common stock was a new position for five out of the six funds. One of the five funds also had put options on HEES. Considering all we get through 13F filings is a snapshot at the end of the quarter, it is not clear whether they started a position in HEES when United Rentals had an agreement to buy HEES for $92 per share in cash or after Herc Holdings showed up with a higher offer. The situation with HEES is not unique and we have seen several higher offers for deals with definitive merger agreements this year including one that happened this week (Satixfy Communications). This is a welcome change from last year, when several deals fell apart.
The potential acquisition of Surgery Partners (SGRY) by Bain Capital was a position for three funds. Surgery Partners had started considering strategic options, including a sale, as far back as July 2024. In January of this year, Bain Capital submitted a non-binding proposal to acquire the rest of Surgery Partners that it doesn’t already own for $25.75 per share in cash. Bain owns 39% of Surgery Partners. The stock currently trades at $22.81.
The $3 billion acquisition of Triumph Group (TGI) by Warburg Pincus and Berkshire Partners for $26 per share in cash was a new position for three out of the six funds. The spread at one point after announcement was almost 6% but is now down to just 1.27%.
Another interesting position for one of the funds was a long position in Rocket Companies (RKT) through call options. Rocket Companies is currently in the process of acquiring both Redfin (RDFN) and Mr. Cooper Group (COOP) through all stock deals. The firm also had a long position in Redfin.
If you want to stay on top of both pre-deal situations and announced deals, we offer alerts by email for new deals and rumored deals, a daily event-driven monitor that covers all activity across multiple event-driven situations and multiple tools like our merger arbitrage tool and the deals-in-the-works tool. Check out the various plans we offer here or reach out to me for a free two week trial.
Disclaimer: Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.