GE, Bristol-Myers, Magellan show activists' appetite for healthcare M&A

25 February 2019 21:57

Bristol-Myers Squibb and Magellan Health last week became the latest targets of activist fund Starboard Value, joining a growing list of healthcare stocks attracting activist interest, drawn by the sector’s robust M&A activity.

That robustness was shown again today with news that General Electric, which has activist fund Trian on its board, will sell its biotech unit to Danaher for $21 billion in cash.

With so much money being thrown at the sector, other healthcare-related names with activists among their shareholders — and whose stocks look vulnerable — are Cigna, Perrigo, Acadia Health and Baxter.

Activist assault

Starboard on Friday nominated six directors to the board of Magellan and called on the company, in which it has a 9.8 percent stake, to evaluate strategic alternatives, including a sale of the whole company or individual assets.

It's notable that joining Starboard on Magellan’s shareholder roster is another activist fund, Engaged Capital. While Engaged has a much smaller stake in Magellan, at about 1 percent of outstanding shares, it has a track record as an aggressive activist, having won 25 seats on target company boards over the last eight years, the fifth highest tally of any activist fund.

In the event of a proxy fight or negotiated settlement, that added 1 percent and the voice of a second disgruntled shareholder could be key.

Neither Starboard nor Engaged responded to requests for comment.

Bristol-Myers Celgene

Also last week, Starboard nominated five directors to the board of Bristol-Myers Squibb despite holding just 1 million shares in the drug company, which has 1.6 billion shares outstanding. The fund's move came after the company proposed a merger with Celgene.

The fund has yet to disclose its intentions, but the move looks reminiscent of Carl Icahn’s failed bid to block last year’s merger between Cigna and Express Scripts. In that trade, Icahn took a modest stake in Cigna and a “substantial” short position in Express Scripts in the hope of breaking up the deal and benefiting from a resulting fall in the target company’s share price.

There are currently no indications that Jeff Smith’s fund has gone short on Celgene, but the proposed merger is unpopular with some Bristol-Myers shareholders as it would add more than $50 billion in debt to the drug company’s currently lean balance sheet. 

Before its Celgene announcement, Bristol-Myers itself was seen as an acquisition target — a potentially more appealing prospect for company investors.

Healthcare M&A

Healthcare should continue to provide opportunities for activists to interrupt or encourage M&A.

Baker McKenzie and Oxford Economics recently predicted that deals in the sector will increase to $331 billion in 2019, up 5 percent from 2018. Their forecast does not include the GE deal, the Bristol-Myers Squibb Celgene merger, valued at close to $80 billion, or Eli Lilly’s just-announced buy of drug developer Loxo Oncology for about $8 billion in cash.

Behavioral health M&A, Magellan’s sector, is seen to outpace the rest of the industry due to the opioid epidemic and autism treatment.

Demographic tailwinds like those are one reason healthcare stocks have and continue to outperform the equities market, adding downside protection for funds looking to avoid a repeat of the losses seen at the end of 2018.

Activist fund Third Point sold off roughly 25 percent of its portfolio in the last quarter of 2018 but increased its exposure to healthcare stocks. In a letter to investors disclosed last week, Third Point Chairman Daniel Loeb said that he was concerned about the outlook for the equities market in 2019 as the benefits of fiscal easing and recent tax breaks are priced in.

Other targets?

Perrigo and Acadia Health stand out as potential M&A targets with activists among their shareholders, while Cigna and Baxter could face increased activist pressure.

Pharmaceutical company Perrigo is 7.3 percent owned by Starboard, but its shares have fallen 34 percent over a six-month period. Elliott Management last year took a 3.6 percent stake in Acadia Health, which is down 36 percent over 6 months. So far, neither fund has indicated activist intentions regarding those companies.

In late 2018, Third Point took a $109 million stake in Cigna, which has fallen almost 15 percent over the last three months despite having fought off Carl Icahn's opposition to its Express Scripts merger.

Baxter International is also worth watching. Third Point holds 28 million shares for a stake of about 5.2 percent, its largest current investment. Starboard, meanwhile, spent $92 million to obtain a stake of less than 1 percent as of the end of 2018.

Baxter's share price has rebounded from steep losses late last year, but pushing for a sale of company assets might be tempting given current interest in the sector, especially for Third Point, which is trying to regain value and reputation after an 11 percent investment loss in 2018.

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