THQ - THQ: Watch Out For The Merger

2023-06-26 10:06:53 ET

Summary

• Abrdn is set to acquire Tekla Capital Management, expanding into the healthcare and life sciences sector.
• The Tekla Healthcare Opportunities Fund has historically performed well, but could face management changes due to the acquisition.
• If the acquisition is successful, THQ could benefit from research and operational synergies on Abrdn's larger platform.

Thesis

Tekla Healthcare Opportunities Fund (THQ) is an equities closed end fund. As per its literature:

The Fund's objective is to seek current income and long-term capital appreciation through investing in companies engaged in the healthcare industry, including equity securities, debt securities and pooled investment vehicles.

Just like many CEFs, the 'special sauce' for THQ is represented by its management team and its ability to outperform simple ETFs in the healthcare space:

We can see the fund having a decent performance when compared to the Health Care Select Sector SPDR ETF ( XLV ) on a five year lookback. The fund underperforms only slightly the plain vanilla ETF, but is able to generate constant dividends from this market sector. The stability and durability of a successful management team are paramount for the future of this fund. Which brings us to a massive piece of news in the space.

Abrdn Inc. Merger

In a shock development, Abrdn seems to continue to expand its platform, via the acquisition of Tekla Capital Management:

Abrdn, the UK-listed asset manager, has acquired a suite of specialist US closed-end funds as part of its push into the health and biotech sector.

The Edinburgh-headquartered firm has acquired the healthcare fund management capabilities of Tekla Capital Management - a specialist healthcare investment adviser based in Boston.

As part of the deal, Abrdn will acquire four listed healthcare and biotech thematic closed-ended funds, with £2.6bn in assets under management. The funds generated revenue of £26m in 2022.

"Listed closed-end funds have been an area of real strength for Abrdn over many years," said Bird.

"Now the world's third largest closed-end fund manager, we have successfully executed more listed closed-end fund acquisitions than any other investment manager over the last 15 years, and this deal further cements our leading position in this space."

We have written about Abrdn before when they purchased the Delaware Investments platform CEF business. We wrote a couple of merger arbitrage articles on some of the acquired CEFs.

In this case we are not looking at a merger arbitrage, but an outright takeover. Abrdn is expanding into the healthcare and life sciences space by purchasing Tekla.

Implications for Shareholders and Potential Investors

Tekla has been fairly successful in building this niche healthcare and life sciences business, so keeping the management team is paramount. If the platform does not succumb to political maneuvering and the portfolio managers remain in place, the good work that was done thus far will continue. There is a big question mark here though, since mergers can be very difficult endeavors, and a mass departure by key PMs can short-change the Tekla funds. As we currently understand from the public press releases the teams are supposed to stay in place as they are. We shall see.

Secondly, despite a good historical performance, THQ has suffered from constant discounts to NAV:

Down the road, if the merger is successful, we would expect this discount to narrow a bit given Tekla will now be able to benefit from a very large platform like abrdn's. There is definitely a lot of consolidation going on in the CEF space, and large, well run fund families will find research and operational synergies that can translate to better fund discounts down the road. Again, the potential gains here are very much dependent on the way the acquisition is handled.

Conclusion

Abrdn, the UK-listed asset manager is set to acquire the Tekla platform and its suite of CEFs. THQ, a fund which has historically performed fairly in line with a plain vanilla ETF in the healthcare space, could see significant management changes if the acquisition goes side-ways. As of now, in the public space, all indications point towards keeping the portfolio management teams intact. If the announced acquisition is successful, integrating Tekla into a much larger platform like Abrdn will bear positive results down the line, with research and operational synergies possible. A retail investor invested in THQ or considering this fund should keep a close eye on this acquisition and its results.

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