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Akorn: A High-Risk Arbitrage Situation


  • We review the history and risks of the Akorn acquisition by Fresenius Kabi.
  • Characteristics of deals that fail and how a recent increase in spread was the canary in the coal mine.
  • We discuss three potential outcomes for this deal.

Deal Background and Risks:

Last Spring German pharmaceutical company Fresenius Kabi announced that it was acquiring Akorn (AKRX) for $34/share in an all-cash deal worth $4.75 billion. As is usually the case, the stock inched up toward the acquisition price and closed at $33.09 the day after the deal was announced, leaving a potential profit of $0.91 for arbitrageurs, or in other words a spread of 2.75%. The reason I wrote inched up was because Fresenius had indicated more than two weeks before the deal announced that it was in talks to acquire Akorn and the stock had already moved up to trade at $29.77 after that news broke.

The deal was originally expected to close by the end of 2017 and assuming a closing date of December 31, 2017, the annualized spread on the deal was just under 4%. The small spread indicated that the market did not perceive this to be a high-risk deal. Sure there were the usual suspects of risks including shareholder approval, antitrust review by the FTC, and because it was a cross-border deal, approval from the the Committee on Foreign Investment in the United States (CFIUS). This was still early in the Trump Administration and several cross-border deals were yet to be rejected by the CFIUS. The deal received shareholder approval on July 19, 2017, and the main risk that arbitrageurs were worried about was the FTC review.

The Merger Arbitrage Strategy:

Merger arbitrage is a strategy where investors are betting on a deal closing and (usually) capturing a small profit by buying at a lower price in the market and waiting for the deal to close. For those unfamiliar with the strategy, I have written a short introduction to merger arbitrage here. The strategy has a reputation for generating small returns until an

This article was written by

Asif Suria profile picture

Asif Suria is an entrepreneur and investor with a professional background in technology and a focus on event driven strategies including: merger arbitrage, spinoffs, (legal) insider trading, buybacks and SPACs. Asif has been actively investing for over 20 years and sharing his ideas for the past 10.

He is the leader of the investing group Inside Arbitrage where he shares investment ideas rarely found in mainstream financial press. Inside Arbitrage provides access to six different event-driven strategies to expand your investing toolbox, special situations focused tools, qualitative writeups of ideas through weekly articles, and a comprehensive monthly newsletter. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (63)

The problem with Akorn is the tip of the iceberg. The financials are bit shady and need lots of close scrutiny
So it's going to $5?
Hi, Asif:

Are you Arbing NXPI? 4 bucks spread....you see any risk? Chinese MOFCOM shouldn't block this deal. The tender process has been slow - only 19% as of last Thursday. Needs to pass 70%. Also any way to have a direct chat with you? Seeking Alpha's email doesn't seem to work

Asif Suria profile picture
I was in NXPI before the deal was revised higher and exited the position a while ago. Yes the tender has been slow all along as investors were holding out for a higher price and now they got it. Probably still not as much as some were holding out for.

You can reach me directly through the contact form on my website:

Heath Winter profile picture
I was surprised that only 19% of shares had been tendered, too.

However, there's no reason for shareholders, including those like Elliott who have committed to tender, to do so until the Chinese MOFCOM approval is in place.
AKRX still trending toward single digits in April. $9.50 IMO
Companies don’t buy other companies just because of price. There must be other reasons FRE wanted to acquire AKRX. If those reasons are still valid, then a deal will go through. It may not be at the original price, but completing the deal will be easier than the drawn out legal battle. Then the original intent of the acquisition by FRE can be realized.
papuche16 profile picture
I am completely with you. And reading the transcript earnings call of Frenesius where the CEO discusses 'the elephant in the room', one can tell that he takes a fairly pragmatic approach to the issue. I thought that his words were more moderate that some of the headlines that I have read. Also, this investigation has been triggered by an anonymous source. It could literally be anyone, with or without basis. I could be totally in the wrong, but I'm hanging on to my losses on Akorn for now, and hoping for a resolution at or below the deal price.
The issue appears to be more about the reps and warranties rather than MAC per se - that is what CEO mentioned actually. Breach of the reps and warranties can be grounds for termination of the deal. However, if I read the merger agreement correctly, it appears that Akorn has to have had "actual knowledge" of the data integrity breaches for this to be effective, and obviously the breaches would have to be material enough and not capable of being remedied. So the question is, did Akorn's management know about the issue and did not disclose?
Not sure I see the point about business deterioration, because the issues were well known to the buyer and lower EBITDA was in the business plan, so hardly a MAC.
Bottom Fisher 2013 profile picture
I averaged down with Alere to come out with a profit. From the trading charts, Akorn might be cheap at $18. The CEO's arrest had to do with a different company and he has not been convicted of any crime. It had to do with narcotics related drugs promoted illegally at his other company. It may have to do with the method of selling that might have been illegal or questionable. So, I do not blame the acquirer for checking the goods over again.

So far the review of Akorn has not come up with anything to stop the deal. I will have to see if I have the merger agreement in my files. There usually is a merger termination fee. I have Money Gram and they got some cash after the merger was rejected.
Asif Suria profile picture
They discuss the termination fee on page 74 of the proxy statement: http://bit.ly/2G0SDDd

It looks like Akorn will not get a termination fee but could be required to pay Fresenius a fee of $129 million under certain conditions discussed in the proxy statement.
@Asif , Sooo , all Fresenius has to do is throw a " Wrench " , and collect $129 Million ? ... Thx for the Link ..
mergerpie profile picture
AKRX is required to pay the termination fee under 3 scenarios:
1. failure to gather enough votes to approval merger
2. accepts superior merger proposal
3. FRE board determines there is adverse material change.

Scenario 1 & 2 already can't happen so its only scenario 3 that will happen. investors can expect Akorn to rigorously fight the adverse material change if FRE activate the clause bcos suddenly they will be on hook for $129M.

Again, its tedious and time consuming to prove MAE in courts so the best the parties can do is to negotiate a settlement or reduce merger price if indeed there is some wrong doing in the data...

The fact that FRE didn't include a termination fee payable by itself to AKRX makes termination of the merger harder without any MAE as AKRX can sue FRE for performance of merger
thx for update

Buy RAD and sell Jan 2 strike calls.

Cash in hand for RAD now.

Merger agreement in place.

Vanguard files and owns 32 million shares.

I expect early exercise and call away of my shares - a 4% portfolio position.

Reason: $1.83 per share plus ownership of fractional share.

Hated the company and avoided shares at $8.

Reason: Buffet bought MON but not RAD while Einhorn bought both.

Walked into dirty RAD store Edith no customers and poorly stocked shelves when stock was $1 and could not pull the trigger.

Now it is a logical risk reward.


Lost money and bailed on COGT / Chinese/ Canadian rejection by US for merger with foreign entity. Let’s see data analytics plus China.

Hmmm should have seen the hat coming. Wisdom comes from experience. And experience comes from bad judgment.

Not an astronaut on SA. Just call it like I play it.

Good article.

All the best.
It is $1.83 cash per 10 shares of RAD, not per share.
Asif Suria profile picture
You are right. It is 1 share of the new combined company plus $1.83 for every 10 RAD shares or 1.079 shares of the new company.

I discussed it briefly here when the deal was announced: http://bit.ly/2D4RuaG
@Asif , The Deal stinks ... I Believe the Albertsons " Holders " are using $RAD to dispose of Huge Debt , then passing it to the NYSE to Short the hell out of it into Oblivion .... Just sayin ... Too bad , $RAD was starting to look like it would make it , then this happens ...... Where's the investigation ?
great article with facts not just speculations, Asif. I have been picking up nuts in front of a bulldozer for about 15 years. Never learnt from it I guess. Notable disasters included Brocade's acquisition of Foundry networks at the height of the financial crisis - got wiped out because I was doing out options and very leveraged. And the failed JNJ purchase of Guidant in 2005......I took a small loss on AKRX in November smelling something foul. I think in the pharma business a breach in integrity could be a deal breaker but AKRX still has some attraction to Fresinius so a reduced deal in the low 20s is possible but at a 50-50 odds at best. FYI: both Foundry and Guidant were eventually acquired at either a reduced price or by a different company. Good luck everyone!
Asif Suria profile picture
Thank you. Great to hear from someone who has been doing this a lot longer than I have.
Detroit Bear profile picture
This was one of the more high risk arb situations I've seen. If you followed AKRX, this shouldn't be a surprise.
Exile of the Mainstream profile picture
AKRX was a mess from 2015-2016 exactly, I'm surprised someone wanted to actually buy them.
markscott profile picture
Isn't it funny ,the only people that write these kind of articles are the ones that got out or the ones that missed an opportunity and are hoping for a better entry? Or Both? Why even write the article if there is no alternative in play? About as transparent as Cnn these days imho. Good day!
Asif Suria profile picture
Not sure how you reached that conclusion. I was in the position, took a loss and have decided not to reenter.
markscott profile picture
If the deal goes sour ,I'm sure you will change your mind -no doubt!
Asif Suria profile picture
I admire the skills you have. I wish I had that kind of insight into my future actions.
242work242 profile picture
Good article I also think it will be option 2 a merger with a reduced price... my guess is well over the current price of $18 (although I don't know a more proper current valuation).
anyone more knowledgeable have a guess?
even at 20% less that's still >$27/share..30% less is still > $23/share
so unless this completely falls apart it feels like a good % Of upside..
AKRX was a rather small following for a mid-cap company trading 2M+ shares per day. I’m guessing there isn’t a very big float and a few hands have many shares.
"and will be a loss I will take for 2018."

your closing remark states you have no position...which is it?
Asif Suria profile picture
I did take that loss last week. Perhaps I could have worded that sentence more clearly.
Two big blowups in less than a week. AKRX and SPA. SPA completely blindsided me. It was trading pretty well and an antitrust suit for a $250 million company is insane. AKRX was too wide--something was clearly up. CAB came back from similar spread and triple digit IRR but the odds are clearly against you in this situation.
kingster01 profile picture
shout out to A.S, I've been following for awhile picking up my nuts infront of the bulldozer.
Em me about your primium service.
Asif Suria profile picture
Thank you. Same here, I have been picking up my nuts as well but have been rolled over enough (including today) to realize there is always a bulldozer hovering.
Exile of the Mainstream profile picture

Can you share the returns of the deals you did last year? Curious about how one bulldozer affects the rest of the portfolio on aggregate. If it's also 95% success rate, how do you position 1-2% per deal.?
Asif Suria profile picture
Since the merger arb positions are part of a portfolio with a number of other positions, I will have to look through my trading history and get back to you.

Deal size positioning ranges from 3% to 8% depending on the perceived risk of the deal. This has helped me in the past (Rite Aid) but not this time because Akorn was towards the high end of this range.
mariyatrader profile picture
Street arb lore is that a MAC has never caused a deal to fail, Technically that may be true, but, if the buyer refuses to write a check, the deal will not close at the deal price, regardless of of the reason, the words, the ultra tight merger agreement, the BS. I have this argument with arbs all the time. I always win.

Notable examples of this phenomenon, all from the financial crisis,era, are HUN, URI, and PENN, none of which closed, and HUN and PENN had incredibly tight merger agreements. There are others more recently as well (ALR and CAB of course, which closed at a price materially lower than the original deal price)..

Some arbs get caught up in tight merger agreements, arguments that a MAE has never been called, and other fairy tale thinking. They need to start thinking more rationally.

This deal may close, It isn't dead yet. But betting on $34 looks like a fools errand, when the Street has a price target of $9, and the buyer could probably get it for $22, worse case.

JMHO, YMMV, but don't believe in fairy tales and BS; think rationally and watch history.
AFTER HOURS TODAY, MONDAY MARCH 4 2018 AT 17:28:42 $ 17.93 425,300 SHARE PRINT. Someone bought this block of stock so I say someones Risk Arb went South and a institution picked up another block. Or you have a single share large shareholder, as in Kapoor, still getting margin stock sold. Either way I like the upside versus downside risk
yes someone bought it. it also means someone sold it.
I have had a bit of change course in this one. yesterday when the market was down a lot this stock held over $18. I now am a buyer at $15, rather than $10. It seems to be quite strong, and even if it dips well below $15 in the interim, I feel those buying at $15 in the next month will make out nicely. If you buy at 15 and it goes to 10, then 20, it is a nice ride.
Asif Suria profile picture
That is a good question and I do not recollect a termination occurring because of a material adverse change (MAC) clause.
mergerpie profile picture
very hard to prove unless the wrongdoings were in a big scale that affects alot of future products...
Why didn’t AKRX negotiate a deal termination fee into the acquisition agreement? At this point their business has been damaged by going through this process and may get no compensation from a remorseful buyer.
Any comments in whether a MAC clause reason for termination has ever been successful? I’m an alum of the Alere acquisition and as acrimonious as that deal grew, it finally closed within 15% of the original price. I’m hoping for the same thing here.
The deal is pretty clearly dead IMO.

However there is still some value in the company. I think it is worth at least $11-12.50 per share on its own.

I got wrecked in the great XIV decline, and in hindsight options trading made it clear the old boys club was about to scam retail investors, as huge put purchases were made in SVXY.

Here, I saw big April $15 put purchase at $2.40. That tells me they will short the stock for at least 100% gain on their puts- so stock will hit $10 before the April options expiration. Just watch and see- it is borderline criminal, but it is the game.
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