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According to today’s Australian Financial Review, “a perfect storm for deal making has Australia on track for a record year of merger and acquisition activity.” In our February blog post RBA lays out welcome mat for takeover mania! Who might be…



According to today’s Australian Financial Review, “a perfect storm for deal making has Australia on track for a record year of merger and acquisition activity.” In our February blog post RBA lays out welcome mat for takeover mania! Who might be next? we predicted this wave of corporate activity this year.

This week’s Dealogic analysis, commissioned by the AFR, reveals $US64.3 billion ($82.8 billion) of deals announced year-to-date, well above the average over the past five years of $US20 billion (excluding COVID-impacted 2020).

The heightened activity, combined with the human desire to belong, can inspire a FOMO (Fear of Missing Out) but each deal must be considered on its merits and not every deal is desirable as I’ll demonstrate here.

One important thing to remember when receiving a takeover offer

A very wealthy and dear friend once advised me; “Roger, you can become rich buying and selling, but you only become wealthy buying and holding.”

When a small handful of extraordinary investments can take a lifetime to assemble, selling one of them has serious consequences. Quite simply, it has to be replaced.

Takeovers are therefore a mixed blessing for investors. On the one hand, there’s a little satisfaction one’s investment thesis was right. On the other hand, a successful takeover means the loss of a great investment and the onerous obligation to find another. Selling means having to work harder to find an investment to replace the one already held, which of course required little or no further work at all.

On extremely rare occasions, when an asset is so extraordinary as to be irreplaceable, there’s an unassailable case for ignoring a takeover proposal. It is at those times I find myself incensed that someone should be so insolent as to try and steal the asset from me.

Australian Unity Healthcare Property Trust v NorthWest

That is the situation I, and some of my friends, now find ourselves in following a bid, by Canada-based NorthWest Healthcare Properties Real Estate Investment Trust (REIT), backed by Singapore’s Sovereign Wealth Fund, GIC, to acquire the assets of the Australian Unity Healthcare Property Trust (AUHPT) for about $2.7 billion.

So how could it be that we would reject a takeover offer, and one that would provide an immediate uplift to returns? Invest for enough time and it’s a question you too must answer. Fortunately, putting aside the case against our hospitals falling into foreign hands, the answer, in this case, is simply arithmetic.

First, some background

The western world is aging, and hence becoming increasingly dependent on non-discretionary healthcare. Consequently, hospital, medical center and aged care operators are reliable tenants under long-term leases, controlling essential, if not critical social infrastructure that provides property holders with stable and long-term income streams.

And the long-term, stable nature of the tenant/landlord relationship means the reliable, consistent, and sustainable income stream is accompanied by very low volatility.

Hard to find, even harder to replace

Before you conclude that I must be talking about a boring low-yield investment, look at the history of returns, over the last decade, for wholesale unit holders in the Australian Unity Healthcare Property Trust (Figure 1.).

Figure 1. Performance of Australian Unity Property Healthcare Fund 1/5/2011 to 30/4/2021

Source: AUHPT

If you had invested $100,000 on 1 May 2011 your investment at 30 April 2021 has tripled – and today would be worth $303,400.  That’s almost 15 per cent per annum after all fees and expenses, assuming you reinvested your distributions.

Existing management, under the stable long-term governance structure, have delivered investors a total return of 25.09 per cent over the last twelve months and 14.89 per cent per annum over the past five years.

But notice something even more impressive? There was very little, if any, negative volatility.  Even during the outbreak of the COVID-19 pandemic, arguably the most volatile period for many markets in the last thirty years, the trust barely recorded a blip.

High returns with almost zero negative volatility is manna from heaven.

How often do you find defensive assets on long-term leases, generating extraordinary returns, and managed by high caliber people, with deep experience in healthcare and a track record of delivering those solid returns?

The answer is ‘not very’.

Indeed, highly respected fund researchers, Zenith, suggested AUHPT “continues to represent one of the few ways for investors to access this specialist asset class directly.”

And both Zenith, and their equally reputable peers at Lonsec, give their highest possible research rating of Highly Recommended to AUHPT.

No wonder the Canadians and Singaporeans want it.

But don’t let them have it. The fund has been closed to new investment for several years.  Even if you wanted to put invest more you can’t. So why sell such a hard-to-get investment?

Of course, NorthWest will make a big song and dance about how attractive their offer is and how lucky you are to receive it.  All one has to do is ask; why are they being so ‘generous’?  Is their offer so generous they’ll make a low return on their money? Of course not. They know they can generate very attractive returns even after paying you a little more.

Oh, and they’ll keep pestering. But the more they pester, the more they reinforce my point that we’re holding on to something very special.  So why sell it to them, ever?

The numbers

NorthWest are offering $2.55 per unit. The current unit price (net of income) is, let’s say, $2.21. Add on roughly 20 cents per unit in 2022 financial year property revaluations, and another 10 cents per unit of income for 2022, and we arrive at a unit price that is just shy of NorthWest’s offer.

In other words, I will have the same amount of money, as NorthWest’s offer, in my hand in 12 months but I will still own the asset and all the income and revaluations that are to come on the existing properties as well as the returns from the pipeline of developments and redevelopments.

Speaking of potential, the weighted average lease expiry (WALE, which measures the average expiry period of all the leases) is 15.7 years. Only 12 per cent of leases will be renewed in the next five years. But some early renewals are already in progress. Early renewals mean higher property revaluations as the capitalisation rate is tightened for the longer lease term.

Some 73 per cent of leases have an expiry in 2030 or beyond. And the established relationships with tenants including Healius Ltd (The former Primary Healthcare) and Ramsay Health Care also provide access to an expanding future pipeline of new healthcare assets.

NorthWest aren’t offering a penny to me for any of that ‘embedded value’, nor are they offering a premium for the wonderful portfolio that has been assembled. And they’re creating more work for me when I must go out and find another replacement investment.

Most importantly, I might not find another one like it. If I accepted NorthWest’s offer of $2.55 and put the money I receive in a bank term deposit, I’d generate income of just on nine tenths of one cent. That’s equivalent to $892.50 on a $100,000 investment, which is nowhere near the $30,000 I estimate I could receive in FY22 from $100,000 invested in the AUHPT today.  And then one might also make another $30,000 the year after, and the year after and the year after that.

So, here’s the thing, I don’t want to be offered a premium by NorthWest. I want to keep the asset, enjoy the returns, enjoy my job and my family. And I want NorthWest to help save the planet by not sending me junk mail.

Postscript:  For Australian Unity investors who might want liquidity, AUHPT could structure a partnership with an Aussie player to buy those investors out – at a premium of course – while offering a discounted entry to remaining investors as part of another equity raise. A quick chat with a solid ECM adviser can result in an outcome where everyone’s needs are met.

Roger Montgomery owns shares in Australian Unity Healthcare Property Trust. This article was prepared 09 June 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Australian Unity Healthcare Property Trust you should seek financial advice.

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COVID-19 may never go away, but practical herd immunity is within reach

It is unlikely that we will reach full herd immunity for COVID-19. However, we are likely to reach a practical kind of herd immunity through vaccination.

The level of immunity needed — either through vaccination or infection — for practical herd immunity is uncertain, but may be quite high. (Shutterstock)

When people say that we won’t reach “herd immunity” to COVID-19, they are usually referring to an ideal of “full” population immunity: when so many people are immune that, most of the time, there is no community transmission.

With full herd immunity, most people will never be exposed to the virus. Even those who are not vaccinated are protected, because an introduction is so unlikely to reach them: it will sputter out, because so many others are immune — as is the case now with diseases like polio and mumps.

The fraction of the population that needs to be immune in order for the population to have “full” herd immunity depends on the transmissibility of the virus in the population, and on the control measures in place.

It is unlikely we’ll reach full herd immunity for COVID-19.

For one thing, it appears that immunity to COVID-19 acquired either by vaccination or infection wanes over time. In addition, SARS-CoV-2 will continue to evolve. Over time, variants that can infect people with immunity (even if this only results in mild disease) will have a selective advantage, just as until now selection has mainly favoured variants with higher transmission potential.

Electron micrograph of a yellow virus particle with green spikes, against a blue background.
The B.1.1.7 variant of the SARS-CoV-2 virus. Over time, variants of concern will likely continue to emerge. NIAID, CC BY

Also, our population is a composition of different communities, workplaces and environments. In some of these, transmission risk might be high enough and/or immunity low enough to allow larger outbreaks to occur, even if overall in the population we have high vaccination and low transmission.

Finally, SARS-CoV-2 can infect other animals. This means that other animal populations may act as a “reservoir,” allowing the virus to be reintroduced to the human population.

Practical herd immunity

Nonetheless, we are likely to reach a practical kind of herd immunity through vaccination. In practical herd immunity, we can reopen to near-normal levels of activity without needing widespread distancing or lockdowns. This would be a profound change from the situation we have been in for the past 18 months.

Practical herd immunity does not mean that we never see any COVID-19. It will likely be with us, just at low enough levels that we will not need to have widespread distancing measures in place to protect the health-care system.

Read more: COVID-19 variants FAQ: How did the U.K., South Africa and Brazil variants emerge? Are they more contagious? How does a virus mutate? Could there be a super-variant that evades vaccines?

What level of immunity (either through vaccination or infection) we need for practical herd immunity is uncertain, but it may be quite high. The original strain of SARS-CoV-2 was highly transmissible and transmission is thought to be higher still for some variants of concern.

Empty vials of Pfizer's COVID-19 vaccine
To achieve two-thirds immunity, 90 per cent of the eligible population would need to be vaccinated or infected naturally. (AP Photo/John Locher)

The amount of immunity we need will also depend on what level of controls we are willing to maintain indefinitely. Continued masking, contact tracing, symptomatic and asymptomatic testing and outbreak control measures will mean we will require less immunity than we would without these in place.

Some estimates suggest that we may need two thirds of the population to be protected either by successful vaccination or natural infection. If 90 per cent of the population is eligible for vaccination, and vaccines are 85 per cent effective against infection, we can obtain this two thirds with about 90 per cent of the eligible population being vaccinated or infected naturally.

The United Kingdom has already exceeded these rates in some age groups. Higher rates are even better, because there is still uncertainty about the level of transmissibility and vaccine efficacy against infection (although research shows they are very good against severe disease). We don’t want to discover that we do not have enough immunity through vaccination and have another serious wave of infection.

Emerging variants

A sticker reading 'I'm COVID-19 vaccinated' from Vancouver Coastal Health
Booster vaccinations will hopefully allow us to maintain long-term practical herd immunity against future variants of COVID-19. THE CANADIAN PRESS/Jonathan Hayward

Higher vaccine uptake will mean there are fewer infections before we reach practical herd immunity. The remaining unvaccinated individuals will be safer, protected indirectly by the immunity of those around them. Outbreaks will be smaller and rarer, and there will be fewer opportunities for vaccine escape variants to arise and spread.

That said, variants of SARS-CoV-2 will continue to emerge, and selection will favour variants that escape our immunity. Vaccine developers will continue to broaden the spectrum of the vaccines that are available, and boosters will hopefully allow us to maintain long-term practical herd immunity.

It’s possible that an immune escape variant will emerge that is severe enough, and transmissible enough, that it will cause a new pandemic for which we do not have even practical herd immunity. But barring that, while we may not be free of COVID-19, we can be confident that in the not-too-distant future it will be manageable when we return to near-normal life.

Caroline Colijn's research group receives funding from the Natural Sciences and Engineering Research Council of Canada, Genome British Columbia, the Michael Smith Foundation for Health Research, the Public Health Agency of Canada and Canada 150 Research Chair program of the Federal Government of Canada.

Paul Tupper's research group receives funding from the Natural Sciences and Engineering Research Council of Canada.

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Citadel Settles Suit Alleging Former Senior Trader Shared Its Algorithmic “Secret Sauce”

Citadel Settles Suit Alleging Former Senior Trader Shared Its Algorithmic "Secret Sauce"

Citadel has reached a settlement with the British hedge fund it accused of trying to plunder one of its senior traders in an effort to get to its algorit



Citadel Settles Suit Alleging Former Senior Trader Shared Its Algorithmic "Secret Sauce"

Citadel has reached a settlement with the British hedge fund it accused of trying to plunder one of its senior traders in an effort to get to its algorithmic "secret sauce".

GSA Capital Partners LLC and Citadel announced the settlement late last week after Citadel accused the fund of obtaining "closely guarded" trading strategies when it hired the employee in question, Vedat Cologlu, according to Bloomberg. 

GSA said of the settlement that the two firms “recognize and respect the importance and value of the other’s rights over their confidential information and intellectual property.”

We first documented that Citadel was suing British hedge fund GSA Capital in January of 2020, after GSA attempted to hire Cologlu, allegedly in hopes of accessing the quant secrets at the core of Citadel's "ABC" automated trading strategy. 

Recall, we wrote back in November of 2020 that Citadel was seeking around $40 million over claims that GSA was able to obtain information on the strategy via texts and WhatsApp.

Citadel argued late last year that GSA "can't unsee" and can't forget the information that was taken from Citadel's secret algorithm. Citadel is also moving to try and block GSA from using their trading model. GSA has argued that they found no "secret sauce" from a high-level description of the structure of a trading algorithm. 

David Craig, a lawyer for Citadel Securities, said in late 2020: “GSA’s most senior managers now know where and how Citadel makes hundreds of millions of dollars in annual revenues. They cannot forget that information, or put it out of their minds.”

He noted that only 15 of Citadel's 3,000 employees ever had access to the "strategic logic" of the strategy. One of those employees was Cologlu, a 2007 Wharton grad and self-described "stat arb trader", who helped operate and administer the models whose "returns were notably high given the low level of risk it took on."

Citadel has claimed its "ABC" quant strategy cost more than $100 million to develop. In its lawsuit, Citadel alleged that the UK fund wanted Cologlu to hand over confidential information about the strategy:

GSA asked for sensitive information on his equity-trading including his profits and the speed of the trades. And then Cologlu handed over a plan that Citadel argues was based on its own confidential model, including the way the algorithm made predictions.

And there's good reason for the information to be coveted. Citadel Securities has been wildly profitable: the company posted a record $6.7 billion in revenue in 2020. This was almost double the previous high in 2018. The blockbuster result came after some of its traders moved from Chicago and New York to set up shop in a Palm Beach hotel in late March 2020 as the pandemic upended lives and markets across the globe. The results of the privately-held company were released in presentation to investors as part of a $2.5 billion loan Citadel Securities was seeking.

The Citadel securities trading arm started as a high-frequency market-maker in options before pushing into equities. Today, the firm dominates that realm and has had a very close relationship with the likes of the millennials' favorite trading platform, Robinhood. We documented back in September 2020 that Citadel now controls 41% of all retail trading. 

GSA was spun out of Deutsche Bank AG in 2005 and manages around $7.5 billion. Citadel’s legal filing names GSA founder and majority owner Jonathan Hiscox as a defendant, alongside other officials including the chief technology officer.

Back in January 2020, we noted the full details of Citadel's lawsuit. 

Tyler Durden Sat, 06/12/2021 - 14:00

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UK Government Adviser Says Mask Mandates Should Continue “Forever”

UK Government Adviser Says Mask Mandates Should Continue "Forever"

Authored by Paul Joseph Watson via Summit News,

A UK government adviser and former Communist Party member Susan Michie says that mask mandates and social distancing should…



UK Government Adviser Says Mask Mandates Should Continue "Forever"

Authored by Paul Joseph Watson via Summit News,

A UK government adviser and former Communist Party member Susan Michie says that mask mandates and social distancing should continue “forever” and that people should adopt such behaviour just as they did with wearing seatbelts.

Michie, who is a Professor of Health Psychology at UCL and a leading member of SAGE, said such control measures should become part of people’s “normal” routine behaviour.

"Vaccines are a really important part of pandemic control but it is only one part. [A] test, trace and isolate system, [as well as] border controls, are really essential. And the third thing is people’s behaviour. That is, the behaviour of social distancing, of… making sure there’s good ventilation [when you’re indoors], or if there’s not, wearing face masks, and [keeping up] hand and surface hygiene."

"We will need to keep these going in the long term, and that will be good not only for Covid but also to reduce other [diseases] at a time when the NHS is [struggling]… I think forever, to some extent…"

"I think there’s lots of different behaviours that we have changed in our lives. We now routinely wear seatbelts – we didn’t use to. We now routinely pick up dog poo in the parks – we didn’t use to. When people see that there is a threat and there is something they can do to reduce that [to protect] themselves, their loved ones and their communities, what we have seen over this last year is that people do that."

Michie’s comments once again emphasize how many scientific advisers have become drunk on COVID-19 power and never want to relinquish it.

“Unsurprisingly, Channel 5 News made absolutely no effort to scrutinise these claims. The programme’s presenter raised no objection to the idea that mask-wearing and social distancing could continue “forever”, resorting only to friendly laughter,” writes Michael Curzon.

“Professor Michie’s co-panellist, a fellow scientist at UCL, Dr Shikta Das, said:

“I think Susan has made a very good point here,” adding that the vaccine roll-out has created a “false sense of security”.

She concluded:

“I don’t think we are yet ready to unlock.”

How’s all that for balance!

Perhaps unsurprisingly, Michie is known to be a long-time Communist hardliner and was so zealous in her beliefs she garnered the nickname “Stalin’s nanny.”

Her sentiment echoes that of fellow government adviser Professor Neil Ferguson, who once acknowledged that he was surprised authorities were able to “get away with” the same draconian measures that Communist China imposed at the start of the pandemic.

“[China] is a communist one-party state, we said. We couldn’t get away with [lockdown] in Europe, we thought… and then Italy did it. And we realised we could,” said Ferguson.

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Tyler Durden Sat, 06/12/2021 - 11:30

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