Carmignac Merger Arbitrage: Letter from the Portfolio Managers
Dear investors,
After a slightly difficult start to the year, during which we managed to preserve our investors' capital, the performance of our funds rebounded sharply in the 3rd quarter: 1.1% for Carmignac Portfolio Merger Arbitrage (I EUR Acc shareclass) and 1.6% for Carmignac Portfolio Merger Arbitrage Plus (I EUR Acc shareclass).
Quarterly Performance Review
Most of the performance was due to the tightening of most merger arbitrage spreads. These included Ansys, Cerevel Therapeutics, Catalent and Southwestern Energy. On the other hand, some fairly large discounts continued to diverge, mainly because of problems linked to pressure from the competition authorities. These included Hess, Spirent Communications and Shinko Electric Industries.
This good performance was not achieved without volatility.
Firstly, at the beginning of August, the fall in equity markets, particularly in Japan, had a slight impact on merger arbitrage spreads, but this was quickly absorbed over the following days. Then, the US administration's uncertainty over Nippon Steels' acquisition of United State Steel led to sharp swings in the US steelmaker's shares: down 23% in early September, followed by a rebound of almost 20% over the course of the month! As usual, following this spike in volatility, we observed a move to reduce the risk in portfolios, which resulted in the widening of certain merger arbitrage spreads.
Good momentum in M&A activity during the quarter
Overall, M&A activity remained buoyant in Q3 2024: +28% in volume and +36% in value compared with the same period last year. The upturn observed in the 2nd half of last year thus seems to be confirmed in 2024. However, there are regional disparities.
Growth was more modest in the US: +5% in volume terms in the 3rd quarter, which is not surprising given the increased pressure from the antitrust authorities at the start of the year, especially a few months before the presidential elections. Generally speaking, the slowdown in M&A activity before the US elections is recovered in the first few quarters of the following year.
However, the number of deals announced in Europe rose sharply, by 63% compared with the same period last year. The main driver of M&A activity continues to be the United Kingdom, where the undervalued equity market following Brexit is proving particularly attractive to foreign buyers.
Asia is also showing a strong rebound, with an annual volume growth of 55% compared to the same period last year. As we indicated in our previous letters, the change in stock market regulations in Japan has led to an increase in the number of announced M&A deals. One example is the almost $40bn offer, currently hostile, by the Canadian company Alimentation Couche Tard for Seven & i, Japan's iconic local supermarket chain. Such a deal would have been unthinkable before the change in regulations.
The last point to note is the return of Private Equity funds. In the 3rd quarter of 2024, financial companies accounted for 39% of buyers, compared with 14% in the same period last year. The stabilisation of interest rates, followed by the start of the downturn from the 2nd quarter, largely explains the rise in this category of buyers.
Sustained legal activity and bright outlook
In the US, when the antitrust authorities decide to block a transaction, the final decision lies in the hands of the court. After listening to the lawyers of the FTC (Federal Trade Commission) and those of the companies involved in the transaction, a judge appointed specifically for the case decides whether or not to authorise the transaction, generally within a period of a few weeks to a few months.
Two cases are currently under review by the US courts: Kroger's $25bn takeover of Albertson in the food retail sector and Tapestry's $10bn takeover of Capri in the luxury handbag sector.
While the two cases are obviously different, they are both representative of the increased pressure being brought to bear by the FTC, and in particular its Chair Lina Khan, on M&A transactions likely to have a negative impact on the American consumer.
The hearings in each case took place in September. Decisions are expected in the 4th quarter of 2024.
It seems that the lawyers representing Albertson and Kroger were convincing in their demonstration of the benefits of the transaction for the American consumer and for employment in the sector. However, in order to obtain the FTC's approval, the parties had to divest certain assets, and questions remain about the sustainability of the solution proposed by the buyer, In the case of Capri/Tapestry, the heart of the matter lay in the definition of the ‘affordable luxury handbag’ market used by the FTC to assert that the merger would lead to abuse of dominance. It appears that the FTC had difficulty convincing the parties of the relevance of its very narrow market definition. One of the parties' main arguments was that no one in the industry (customers, wholesalers or competitors) had complained about the impact of the merger on future handbag prices. This argument appears to have been successful.
The outcome of these trials will have implications at several levels.
Firstly, obviously, in terms of merger arbitrage spreads for the transactions concerned. It is interesting to note the difference in investors' perception of the two situations. The market is fairly optimistic about Capri/Tapestry's chances of success, with an implied probability of 60%. By contrast, the consensus is more pessimistic about Albertson/Kroger, with an implied probability of success of 10%.
Secondly, if the FTC fails, we can expect a reduction in antitrust pressure on current and future M&A deals. Indeed, after Activision, Horizon Therapeutics and Seagen last year, a new failure for the FTC would tend to invalidate the aggressive approach of its chairwoman Lina Khan against business combinations.
If this were to happen, we could expect to see a tightening of spreads on other pending transactions that are currently subject to antitrust risk. These include Juniper, Catalent, HashiCorp, Surmodics and ChampionX. On the other hand, with the role of the current FTC perceived as being less important by potential acquirers, it would also be possible to envisage a return to more sustained growth in the US M&A cycle in the medium term.
The Merger Arbitrage Team
Carmignac Portfolio Merger Arbitrage I EUR Acc
- Recommended minimum investment horizon
- 3 years
- Risk indicator*
- 2/7
- SFDR - Fund Classification**
- Article 8
*Risk Scale from the KID (Key Information Document). Risk 1 does not mean a risk-free investment. This indicator may change over time. **The Sustainable Finance Disclosure Regulation (SFDR) 2019/2088 is a European regulation that requires asset managers to classify their funds as either 'Article 8' funds, which promote environmental and social characteristics, 'Article 9' funds, which make sustainable investments with measurable objectives, or 'Article 6' funds, which do not necessarily have a sustainability objective. For more information please refer to https://eur-lex.europa.eu/eli/reg/2019/2088/oj.
Main risks of the fund
Fees
- Entry costs
- We do not charge an entry fee.
- Exit costs
- We do not charge an exit fee for this product.
- Management fees and other administrative or operating costs
- 0,62% of the value of your investment per year. This estimate is based on actual costs over the past year.
- Performance fees
- 20,00% when the share class overperforms the Reference indicator during the performance period. It will be payable also in case the share class has overperformed the reference indicator but had a negative performance. Underperformance is clawed back for 5 years. The actual amount will vary depending on how well your investment performs. The aggregated cost estimation above includes the average over the last 5 years, or since the product creation if it is less than 5 years.
- Transaction Cost
- 0,30% of the value of your investment per year. This is an estimate of the costs incurred when we buy and sell the investments underlying the product. The actual amount varies depending on the quantity we buy and sell.
Performance
| Carmignac Portfolio Merger Arbitrage | 2.7 |
| Carmignac Portfolio Merger Arbitrage | + 3.4 % | - | + 3.6 % |
Source: Carmignac at 29 Nov 2024.
Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor).
Carmignac Portfolio Merger Arbitrage Plus I EUR Acc
- Recommended minimum investment horizon
- 3 years
- Risk indicator*
- 3/7
- SFDR - Fund Classification**
- Article 8
*Risk Scale from the KID (Key Information Document). Risk 1 does not mean a risk-free investment. This indicator may change over time. **The Sustainable Finance Disclosure Regulation (SFDR) 2019/2088 is a European regulation that requires asset managers to classify their funds as either 'Article 8' funds, which promote environmental and social characteristics, 'Article 9' funds, which make sustainable investments with measurable objectives, or 'Article 6' funds, which do not necessarily have a sustainability objective. For more information please refer to https://eur-lex.europa.eu/eli/reg/2019/2088/oj.
Main risks of the fund
Fees
- Entry costs
- We do not charge an entry fee.
- Exit costs
- We do not charge an exit fee for this product.
- Management fees and other administrative or operating costs
- 1,11% of the value of your investment per year. This estimate is based on actual costs over the past year.
- Performance fees
- 20,00% max. of the outperformance if the performance is positive and the net asset value exceeds the high-water mark. The actual amount will vary depending on how well your investment performs. The aggregated cost estimation above includes the average over the last 5 years, or since the product creation if it is less than 5 years.
- Transaction Cost
- 0,84% of the value of your investment per year. This is an estimate of the costs incurred when we buy and sell the investments underlying the product. The actual amount varies depending on the quantity we buy and sell.
Performance
| Carmignac Portfolio Merger Arbitrage Plus | 3.2 |
| Carmignac Portfolio Merger Arbitrage Plus | + 2.6 % | - | + 3.5 % |
Source: Carmignac at 29 Nov 2024.
Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor).
Related articles
Our Merger Arbitrage strategies win ‘Best new launch’ award
Best ESG Alternative Fund award goes to Carmignac
Marketing communication. Please refer to the KID/KIID, prospectus of the fund before making any final investment decisions. This document is intended for professional clients.
This material may not be reproduced, in whole or in part, without prior authorisation from the Management Company. This material does not constitute a subscription offer, nor does it constitute investment advice. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. This material has been provided to you for informational purposes only and may not be relied upon by you in evaluating the merits of investing in any securities or interests referred to herein or for any other purposes. The information contained in this material may be partial information and may be modified without prior notice. They are expressed as of the date of writing and are derived from proprietary and non-proprietary sources deemed by Carmignac to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Carmignac, its officers, employees or agents.
Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor). The return may increase or decrease as a result of currency fluctuations, for the shares which are not currency-hedged.
Reference to certain securities and financial instruments is for illustrative purposes to highlight stocks that are or have been included in the portfolios of funds in the Carmignac range. This is not intended to promote direct investment in those instruments, nor does it constitute investment advice. The Management Company is not subject to prohibition on trading in these instruments prior to issuing any communication. The portfolios of Carmignac funds may change without previous notice. The reference to a ranking or prize, is no guarantee of the future results of the UCIS or the manager.
Morningstar Rating™ : © Morningstar, Inc. All Rights Reserved. The information contained herein: is proprietary to Morningstar and/or its content providers; may not be copied or distributed; and is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Access to the Funds may be subject to restrictions regarding certain persons or countries. This material is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the material or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not access this material. Taxation depends on the situation of the individual. The Funds are not registered for retail distribution in Asia, in Japan, in North America, nor are they registered in South America. Carmignac Funds are registered in Singapore as restricted foreign scheme (for professional clients only). The Funds have not been registered under the US Securities Act of 1933. The Funds may not be offered or sold, directly or indirectly, for the benefit or on behalf of a «U.S. person», according to the definition of the US Regulation S and FATCA.
The risks, fees and ongoing charges are described in the KID (Key Information Document). The KID must be made available to the subscriber prior to subscription. The subscriber must read the KID. Investors may lose some or all their capital, as the capital in the funds are not guaranteed. The Funds present a risk of loss of capital.
The Funds’ prospectus, KIDs, NAVs and annual reports are available at www.carmignac.com, or upon request to the Management Carmignac Portfolio refers to the sub-funds of Carmignac Portfolio SICAV, an investment company under Luxembourg law, conforming to the UCITS Directive. The French investment funds (fonds communs de placement or FCP) are common funds in contractual form conforming to the UCITS or AIFM Directive under French law.
In France, Luxembourg, Sweden: The risks, fees and ongoing charges are described in the KID (Key Information Document). The KID must be made available to the subscriber prior to subscription. The subscriber must read the KID. Investors may lose some or all their capital, as the capital in the funds are not guaranteed. The Funds present a risk of loss of capital. The Funds’ prospectus, KIDs, NAV and annual reports are available at www.carmignac.com, or upon request to the Management.
In the United Kingdom: the Funds’ respective prospectuses, KIIDs and annual reports are available at www.carmignac.co.uk, or upon request to the Management Company, or for the French Funds, at the offices of the Facilities Agent at BNP PARIBAS SECURITIES SERVICES, operating through its branch in London: 55 Moorgate, London EC2R. This document was prepared by Carmignac Gestion, Carmignac Gestion Luxembourg or Carmignac UK Ltd. FP Carmignac ICVC (the “Company”) is an Investment Company with variable capital incorporated in England and Wales under registered number 839620 and is authorised by the FCA with effect from 4 April 2019 and launched on 15 May 2019. FundRock Partners Limited is the Authorised Corporate Director (the “ACD”) of the Company and is authorised and regulated by the FCA. Registered Office: Hamilton Centre, Rodney Way, Chelmsford, Essex, CM1 3BY, UK; Registered in England and Wales with number 4162989. Carmignac Gestion Luxembourg SA has been appointed as the Investment Manager and distributor in respect of the Company. Carmignac UK Ltd (Registered in England and Wales with number 14162894) has been appointed as a sub-Investment Manager of the Company and is authorised and regulated by the Financial Conduct Authority with FRN:984288.
In Switzerland: the prospectus, KIDs and annual report are available at www.carmignac.ch, or through our representative in Switzerland, CACEIS (Switzerland), S.A., Route de Signy 35, CH-1260 Nyon. The paying agent is CACEIS Bank, Montrouge, Nyon Branch / Switzerland, Route de Signy 35, 1260 Nyon.
The Management Company can cease promotion in your country anytime.
Investors have access to a summary of their rights in English on the following links: UK ; Switzerland ; France ; Luxembourg ; Sweden.