Hedge fund managers that wagered billions on Chevron Corp.’s October deal to purchase Hess Corp. are sticking to their bets regardless of one other roadblock that would probably torpedo the acquisition.
Exxon Mobil Corp. mentioned final week it has the primary proper to buy Hess’s stake in a profitable offshore oil growth they collectively personal off the coast of Guyana, the crown jewel of Chevron’s $53 billion acquisition. It follows escalating tensions between Guyana and neighbor Venezuela which have prompted some to reassess the probability of the takeover going by way of.
That’s rising the dangers for hedge funds like Millennium Administration, Pentwater Capital Administration, Balyasny Asset Administration and others, which scooped up nearly an eighth of Hess’s shares by the top of December, greater than $5 billion complete — making it probably the most well-liked merger-arbitrage positions for the group, in accordance with information compiled by Bloomberg.
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Millennium, Pentwater and Balyasny declined to remark, whereas a consultant for Adage Capital Administration didn’t reply to requests for remark.
“I’m not denying that it is a fly within the ointment,” mentioned Roy Behren, co-chief funding officer at Westchester Capital Administration, one of many institutional buyers with a big place in Hess’s shares. “However regardless of the noise surrounding this and the Venezuela state of affairs, we nonetheless imagine the deal is extra more likely to be accomplished than not.”
Buyers at two hedge funds with massive merger-arbitrage wagers on the deal echoed the sentiment. They requested to not be named as a result of they aren’t licensed to talk publicly. The distinction between Hess’s buying and selling value and the worth of the takeover provide has narrowed to about $7, from as large as $11 following the Exxon announcement, one other signal of rising market confidence that the deal will get performed.
The dangers concerned with the Hess deal illustrate the complexities of betting on the outcomes of huge company takeovers. Merger-arbitrage buyers are already navigating a more durable antitrust atmosphere beneath the Biden Administration, and dealmaking is just simply beginning to bounce again after a steep slowdown final yr.
Regardless of sticking to their bets, among the huge hedge funds are nonetheless extra cautious concerning the deal now than they have been when it was introduced given the latest developments.
A part of the complication for arbitrage merchants was that the stake dispute stemmed from Exxon and Chinese language oil large Cnooc Ltd.’s joint working settlement with Hess concerning the Guyana asset. As a result of the contract isn’t public, it’s arduous for buyers to evaluate the way it might play out, and its impression on deal’s closing timeline, which is scheduled round mid-2024.
“Chevron has made it clear that it doesn’t suppose the suitable of first refusal difficulty is relevant, and most buyers appeared to have gotten round to that view,” mentioned Frederic Boucher, a risk-arbitrage analyst at Susquehanna Monetary Group, which is a market maker in Hess’s securities. Chevron mentioned final week that it’s “absolutely dedicated” to the Hess deal and doesn’t imagine the contract or discussions with Exxon will forestall its completion.
The chance that Exxon may ultimately make a bid for Hess outright may need contributed to the unfold narrowing, Boucher added.
“We owe it to our buyers and companions to think about our preemption rights in place beneath our Joint Working Settlement to make sure we protect our proper to appreciate the numerous worth we’ve created and are entitled to within the Guyana asset,” Exxon mentioned in a press release.
Geopolitical tensions — one other key uncertainty — have additionally abated after Venezuelan President Nicolas Maduro exchanged presents with Guyana’s President Irfaan Ali on the sidelines of the latest Group of Latin American and Caribbean States assembly.
The market now seems to be pricing in anyplace between a 65% to 75% probability of the deal going by way of — up from 55% to high-60% final week, in accordance with a number of market specialists, primarily based on various assumptions of Hess’s standalone worth if the merger fails.
Many hedge funds additionally owned sizable choices positions that appeared to guard in opposition to a drop in Hess’s share value, although it’s not attainable to discern from regulatory filings how a lot of a decline they’re shielded in opposition to.
Curler-Coaster Experience
The Chevron-Hess deal was a welcome aid for merger-arbitrage buyers who had struggled for a lot of final yr to search out engaging alternatives due to a slowdown in dealmaking. They reckoned the acquisition was much less more likely to face the extraordinary regulatory scrutiny that Microsoft Corp.’s takeover of Activision Blizzard Inc. was confronted with. As a result of it was the second largest oil merger introduced final yr, features have been touted to be hefty if the deal went as deliberate.
The primary indicators of hassle got here in December, when Venezuela threatened to seize mineral-rich areas in Guyana. Hess’s inventory fell to about $14 beneath the worth of Chevron’s bid, the widest hole because the deal was introduced.
Involved hedge fund executives from London and New York flocked to the Guyana Power Convention & Provide Chain Expo in Georgetown final month as geopolitical tensions between the 2 South American international locations simmered, in accordance with folks with data of the matter.
Georgetown’s high inns have been absolutely booked because of the surge in demand, and a few fund managers ended up having to share rooms, the folks mentioned, asking to not be recognized discussing a non-public matter. Costs for round-trip enterprise class tickets from London to the capital metropolis of Guyana surged to greater than £10,000 on the time.
Now, fund managers are ready to see whether or not the stake dispute will get resolved by way of negotiations. Chevron mentioned that it might cancel the takeover if the dispute does go to arbitration and Exxon wins.
Brett Buckley, an event-driven strategist at Wallachbeth Capital, known as it a “high-consequence, low-probability occasion,” including that whereas the preemptive rights dispute with Exxon and Cnooc provides an additional layer of threat for arbitrage buyers, it’s unlikely that it might impression the deal final result.
“These disputes can come up throughout transactions like this,” he mentioned. “It needs to be amicably resolved by the related events.”
