After going through a dull first quarter, Allen Global Partners did well in the second. The fund which invests in both credit and equities was up 3.75% in 2Q2014, bringing the year-to-date return to +4.75%.
M&A volume rises to $1.5 trillion
In the previous investor update, Allen Global had expressed high hopes for further M&A activity in the year. The fund’s conviction paid off in the later quarter, as mergers and acquisition events in its holdings proved beneficial for the fund’s returns. The Q2 letter seen by ValueWalk noted that M&A volume surged to $1.5 trillion in the first half of 2014 which amounts to a 50% increase compared to the same period of 2013.
Allen Global said that corporate decision-making has become aggressive and has moved past the simple methods like, spin-offs and returning cash to shareholders. Companies are now exuding more confidence by putting forward unsolicited takeover offers and by rivaling each other in bidding wars. The letter said that U.S-based companies are especially motivated to merge with foreign ones in order to reduce their tax burden. Such acquisitions allow these companies to domicile themselves in foreign countries and enjoy a much lower tax rate through a process called tax inversion. Since there are chances that new legislation will make it harder for U.S companies to have this leverage, corporates are rushing to finish off these deals before any restrictive regulation is passed by Congress.
Allen Global’s P&L in second quarter
Allen Global’s top contributions to performance came from investments in Hillshire Brands Co (NYSE:HSH), Anadarko Petroleum Corporation (NYSE:APC) Covidien plc (NYSE:COV), Cheniere Energy, Inc. (NYSEMKT:LNG), Shire PLC (ADR) (NASDAQ:SHPG), Mallinckrodt PLC (NYSE:MNK) and American International Group Inc (NYSE:AIG).
Allen Global gained from Hillshire as the stock surged in response to unsolicited bids from Pilgrim’s Pride Corporation (NASDAQ:PPC) and Tyson Foods, Inc. (NYSE:TSN). Hillshire reached an agreement to be acquired by Tyson Foods for $63/ share or for $8 billion in cash.
Cheniere Energy was another one of Allen Global’s winners, the company has marked several major wins in its Liquified Natural Gas (LNG) business. Cheniere is set to become the first U.S-based exporter of LNG and with success in smoothing out regulatory hiccups, the company is set to become a leading global gas company. Allen Global’s holding in another energy company, Anadarko Petroleum moved favorably as the company reached a settlement to pay $5 billion in a conveyance claim.
The fund’s profit and loss themes of Q2 are very similar to another hedge fund, Eton Park, that we covered a few weeks back, take a look here.
Pharmaceuticals’ mergers drive Allen Global’s returns
Medtronic, Inc. (NYSE:MDT) offered to buy Covidien plc (NYSE:COV) on a 30% premium. Covidien is an Irish- domiciled company that makes surgical supplies. Allen Global initiated an investment in Covidien last year which has returned profitably after Medtronic’s bid was accepted by Covidien.
The fund gained from Mallinckrodt PLC (NYSE:MNK), an Irish pharmaceuticals company that made an offer to buy Questcor Pharmaceuticals for $5.6 billion.Shire Plc, a British pharmaceutical company gained in the second quarter after receiving an unsolicited bid from AbbVie Inc (NYSE:ABBV).
Allen Global stumbled in its position in AstraZeneca plc (ADR) (NYSE:AZN) (LON:AZN), as the stock fell after Pfizer’s unsolicited bid failed to get approval from AZN’s board. Pfizer made a $100 billion bid for the British pharmaceutical company in an attempt to make the world’s largest pharma company. If the deal had happened, it would have helped Pfizer in moving its domcilile from U.S to the U.K and benefit from a tax inversion. Since the initial bid failed, Pfizer has to wait six months before making another offer.