Mylan Shareholders Well Placed in the Mylan–Teva Deal
An Arbitrageur's Take on the Mylan–Teva Situation (Part 5 of 5)
The spread is unusually wide
Typically in a hostile approach, the stock of the target company will trade at a premium to the initial offer. This reflects the fact that (a) the first bid is always low and will be increased and (b) the company is now in play and other suitors may have interest. In this situation, Mylan (MYL) is trading at $74.20, a big discount to Teva Pharmaceutical Industries’ (TEVA) $82 offer. Granted, theres going to be antitrust issues with this deal, but that’s a huge spread.
Remember that most hostile deals end up being friendly. The board of directors has a fiduciary duty to maximize shareholder value, and flatly turning down an offer is going to anger shareholders. Mylan is a big company, but inevitably the shareholder base changes hands from vanilla, long-only shareholders to arbitrageurs. And arbs don’t care about the strategic value of staying independent. They want to capture the spread and go home.
In this case, Mylan stock was trading at around $66 a share before the Teva speculation made the news. Look at the chart above, and imagine you are short the spread. If the deal closes as advertised, you get about $7.80. If the deal falls apart, and Mylan goes back to their pre-deal level, you lose about $8. So it’s a 1:1 risk-to-reward ratio, which is pretty attractive.
This also tells you that the market is taking a very skeptical view of this transaction. Given that Teva is motivated to replace lost revenue—its biggest drug is facing generic competition—and that Wall Street really seemed to like the Perrigo (PRGO) transaction, Mylan shareholders are in a good spot.
Other merger arbitrage resources
Other important merger spreads include the Hospira–Pfizer deal. The Hospira (HSP) and Pfizer (PFE) merger is set to close in 2H15. For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.
Investors that are interested in trading in the healthcare sector should look at the Health Care Select Sector SPDR Fund (XLV).
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