Hedge funds bleed as AbbVie reconsiders Shire bid


(Reuters) - Some of the world's best known hedge funds lost hundreds of millions of dollars in the value of the stock they hold as Shire plunged after AbbVie's decision to reconsider its $55 billion bid for the British healthcare group.

Data from Britain's Financial Conduct Authority (FCA) regulatory body showed that no fund had a major "short" position of more than 0.5 percent, indicating that most hedge funds were confident of the deal's success.

Billionaire hedge fund manager John Paulson's Paulson & Co along with Elliott Management, the investment arm of hedge fund billionaire Paul Singer, were among those that had built "long" positions after buying Shire shares.

Shire's value plunged more than 20 percent on Wednesday from around $49 billion to $39 billion, wiping around $500 million from the value of Paulson's stake and $270 million off Elliott Management's stake, according to Reuters calculations.

Chicago-based AbbVie was eager to buy Shire to reduce its U.S. tax bill by moving its tax base to Britain.

"It seems Abbvie is getting cold feet due to changes in tax rules in U.S. and also perhaps ongoing correction in markets," said Amit Jain, co-founder of hedge fund Amagis Capital that held bets on the deal going through.

The U.S. Treasury Department unveiled changes on Sept. 22 to the rules for so-called corporate "inversions," which have become a cause of concern in Washington because of the threat posed to U.S. corporate income tax receipts.

Shire's shares fell 2.5 percent the day after the tax changes were announced and the stock's latest slump has now wiped $13 billion off its market capitalization.


Paulson had been steadily building a long position on Shire since June 23, when news of a potential deal first emerged.

By Oct. 10, he had became the second-largest shareholder in Shire, owning 4.7 percent of the company, a stake worth 1.44 billion pounds ($2.29 billion) as of Oct. 14.

Singer's Elliott Management had a 1.4 percent stake while Magnetar Financial, whose strategies include "event-driven" trading such as takeover bid situations, had a 2.8 percent stake.

The hit to Shire's shares trended on Twitter under the banner of 'Arbageddon', signifying how merger arbitrage funds would have suffered from Shire's slump.

SteppenWolf Capital chief investment officer Phoebus Theologites said there was a high chance that specialist 'merger arb' funds would have been burnt by the drop in Shire stock.

"That’s the name of the game - you win some, you lose some. We discussed going long Shire last year, as a takeover target, and I nixed it on the basis that a macro fund has no place trading specials or risk arbs," said Theologites.

One hedge fund with a position in Shire admitted being caught out by AbbVie's change of heart.

"We just don’t know what's happened. One of these situations that is being held very closely. The tone from the AbbVie camp since the new U.S. rules has been very instructive up until now. They have been very keen to do the deal," said the hedge fund manager, who declined to be named.

"So there is a disconnect between the tone so far and what we see today. Figuring to where that disconnect comes from is key for us," added the hedge fund manager.

Nevertheless, in spite of Wednesday's setback some hedge fund managers still held out hope that a deal could be reached.

"The CEO of AbbVie has much at stake here, having so much pushed for the deal regardless of the tax benefits, so he surely has a vested interest in making it happen," added another hedge fund manager, on condition of anonymity.

($1 = 0.6282 British Pounds)