In merger arbitrage, an investor generally buys the stock of the company being acquired, short sells the relevant ratio of the acquirer’s stock if applicable, and waits for the deal to close. When the merger is complete, the investor exchanges the stock of the company being acquired for the amount agreed on in the deal.
Consolidation in the healthcare sector continues
On April 28, Abbott Labs (ABT) and St. Jude Medical (STJ) announced an agreement where Abbott will buy St. Jude for $30 billion in cash, stock, and assumed debt. On a per-share basis, the consideration works out to about $85 per share. This deal is the latest in a flurry of merger activity in the healthcare sector. As hospitals increase their size and scale, they’re becoming more powerful negotiating partners. Abbot’s tie-up with St. Jude is a reaction to that phenomenon.
Abbott and St. Jude offer complementary products in the cardio space. While Abbott is a leader in stent technology, St. Jude brings its strength in pacemakers, heart valves, and defibrillators.
St. Jude shareholders will receive $46.75 in cash plus 0.87 shares of Abbott for each share of St. Jude they own. The companies anticipate closing the deal in 4Q16. If you assume an end-of-the-year close, the arbitrage spread is trading at just below 10% annualized.
Other merger arbitrage resources
Other important merger spreads include the Cigna (CI)-Anthem (ANTM) deal. It’s slated to close in 2H16. For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.
Investors who are interested in trading in the healthcare sector should look at the S&P SPDR Healthcare ETF (XLV)