An Alimentation Couche-Tard press conference on their bid for Seven & i Holdings in Tokyo in March. The Montreal-based retailer walked away from the deal on Wednesday.Kim Kyung-Hoon/Reuters
Hedge fund managers are licking their wounds or celebrating a win after corner store operator Alimentation Couche-Tard Inc. ATD-T rocked markets by abandoning its US$46-billion takeover of 7-Eleven parent Seven & i Holdings Co. SVNDF.
Money managers who invest in takeovers, known as arbitrage funds, had nearly a year to make wagers on the outcome of Couche-Tard’s pursuit of Seven & i, in what would have been the largest foreign takeover of a Japanese company. The two players were attractive arbitrage targets, as both have large numbers of shares trading on exchanges.
Late Wednesday, the corporate drama ended when the Montreal-based retailer surprised investors by walking away after failing to get meaningful engagement from Seven & i executives.
Couche-Tard shows institutional investors will back big dreams
Arbitrage funds betting on a Couche-Tard takeover owned roughly US$1-billion of Seven & i stock, or about 55 million shares, according to research by Tebbs Capital, which specializes in event-driven market research. These funds scrambled to sell their holdings, at a loss, as Seven & i’s stock price dropped by 9 per cent on news that the takeover talks were finished. Their losses could have amounted to US$90-million.
“Over all, these positions are unlikely to cause pain,” said Tyler Tebbs, chief executive officer at Tebbs Capital. “This was no longer a huge position for arb funds, as most lost confidence in the likelihood of a deal earlier in the year.”
In April and May, Mr. Tebbs said a handful of hedge funds began increasing positions that would make money if the transpacific takeover failed. These funds short-sold approximately 4.8 million Seven & i shares. Short sellers borrow and sell a stock in anticipation of buying it back later at a lower price. That proved a money-making strategy.
There were also a few arbitrage funds investing in Couche-Tard shares in anticipation of a spike in price if the deal fell apart. Mr. Tebbs said: “Owning Couche-Tard would have been a great trade today, but I doubt many had this structure on.”
On Thursday, investors bought and sold 54.5 million Seven & i shares on the Tokyo Stock Exchange, nine times the normal trading volume. The stock closed at 2,007.50 yen, well below Couche-Tard’s cash offer of 2,600 yen per share.
Couche-Tard’s stock price jumped 8.3 per cent to $74 on the Toronto Stock Exchange and trading was five times the average volume, with 6.7 million shares changing hands.
Merger arbitrage is a hedge-fund strategy with historically decent returns. Over the past 12 months, the benchmark Hedge Fund Research merger arbitrage index is up by 10.3 per cent.
However, the failure of a single large takeover can blow up the arbitrage fund sector’s performance. In a recent report, U.S. asset manager Neuberger Berman Group LLC showed that when a planned 2022 merger between chemical makers DuPont de Nemours Inc. and Rogers Corp. fell apart, the entire arbitrage index lost 2.25 per cent. The fund manager said: “That might not sound like a lot – but this is an index that generally grinds out a relatively steady, incremental return of 1 to 3 per cent a year."