Certainly one of the sweetest Japanese shorts on the books today is Takeda Pharmaceuticals (4502 JP), which announced in May a $60 billion acquisition of Shire. “This is an acceleration of Takeda transformation,” said Takeda CEO Christophe Weber, at a May 9 conference call; definitely not something Takeda is “considering because our current strategy is not working.” Not working indeed. Since January Takeda’s share price has trended in one direction—down almost 30% from 6666 yen on January 10, to the current 4737 yen.
Then on March 27 came a quiet day of reckoning that passed all but unheralded. That’s the day Takeda shares hit a death cross. In technical terms the Japanese pharma’s 50-day trading average dropped below its 200-day average, a sign that institutional trading was losing momentum. It has stayed below ever since and remains at an 11% discount.
The cross coincided with the March 31 resignation of chief financial officer James Kehoe, sparking, in the words of J.P. Morgan analyst, “doubts” about management stability. Technical traders take the death cross as a sign to short, depending on the circumstances. Slowly, steadily, short positions increased, even after the deal was announced on May 8.
Small wonder then that Takeda shares rank today as the largest short in the Japanese market with $6.59 billion in borrowings, according to S3 Partners data. That’s more than twice the market value of Toyota Motors, the second largest short.
In retrospect Takeda’s proposed merger with Shire appears as a response to a loss in institutional support—one that so far has failed to halt the slide; and bound to attract resistance as it wends its way through multiple approvals on several continents.
As announced, Shire shareholders get $30.33 in cash and .839 Takeda shares for every Shire share—roughly $64 per share. Shire shares now trade at about $40 apiece as the deal ambles its way toward completion sometime by mid-2019. It has already witnessed dissident shareholder objections, and has yet to receive full shareholder and regulatory approval from multiple jurisdictions. But Takeda insists that the financing is being put in place and the deal is progressing. Takeda justifies the merger as being designed to create a global competitor with a strong strategic fit and a larger complementary pipeline of new drugs. The Japanese company sees significant financial benefits to secure its status as a global player in the pharmaceutical business.
The large and growing short position indicates that the shorts disagree and see more trouble ahead. The total market value of Takeda’s borrowed shares was $6.59 billion, almost 50% of the value came within the last month $2.16 billion, and 23% in the last week, according to S3 Partners statistics.
Research Note written by Jack Willoughby
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Managing Director Predictive Analytics, S3 Partners, LLC
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