John Paulson discusses Mallinckrodt, AT&T/Time Warner merger, Altice, Fannie Mae and Fredde Mac developments in his merger arb November letter to investors. It was a rough month for Paulson down four percent in November in what was another rough year for the famous hedge fund manager.
Mallinckrodt was the largest detractor in November after reporting Q3 sales declining 10% year-on-year (YoY), highlighting payer pressures in its best-selling branded drug Acthar. Overall adjusted Q3 earnings of $1.97 beat estimates, but the stock sold off 29% over the month. With Mallinckrodt trading at 3x 2018 estimated earnings per share (EPS), the market is reflecting an extreme downside case for Acthar which we don't believe is realistic.
Despite being a very small position, Altice was the second largest monthly detractor given its intra-month movement after reporting a 2% YoY decline in top line sales growth. Altice still has very good assets, and we think there is potential for consolidation in the French telecoms sector. We also think it will sell its French and Portuguese towers as well as its business in the Dominican Republic, which would produce €4bn of proceeds and
help the company de-lever.
In the announced deals portfolio, the spread of Time Warner/AT&T widened after the US Department of Justice (DoJ) sued to block on competition grounds, with the transaction now moving into litigation. No vertical merger has been blocked by the DoJ in over 40 years and the DoJ must now demonstrate that the proposed merger would= lessen competition substantially. Although the outcome of litigation is never predictable, the $14.65 spread (16.1% net) at the end of November is very attractive, and additionally given Time Warner's strong business, we believe there is strong downside protection.
Treasury Secretary Mnuchin, one of the key decision-makers on the future of the government-sponsored enterprises (GSEs), has said his priorities are taxpayer protection and mortgage market liquidity. Both can be achieved by allowing the GSEs to retain earnings, raise new capital, and build up their capital base. We believe restoring the GSEs is in the interest of US tax payers and the housing market, and anticipate a positive outcome
here.
