At Hillside Advisors, we first recommended Intermune convertibles and stock on June 26th and then again on August 11th. In each case the stock was trading just above $44.
The first time we led our note by saying “Look for Intermune stock to continue its strong performance in anticipation of a takeout, which we believe will ultimately occur. It makes too much sense not to happen.” We posted this on the Hillside Advisors website, several weeks before we launched our flagship Hybrid Vigor newsletter.
In our second note, part of our ninth issue of Hybrid Vigor, we argued that Intermune’s aggressive internal development would actually help spur an acquisition. This went against what many followers of the name were saying. “A strong internal strategy also improves ITMN’s negotiating position,” we wrote two weeks ago. We closed by suggesting that the 2.5% convertibles of 2018 “can provide long-only convertible investors exposure to Esbriet’s US approval and early launch and, yes, a potential takeout.”
Yesterday, Intermune announced that it had reached a definitive agreement to be acquired by Roche for $74 per share. At an $8.3 billion takeout valuation, the deal represents a very attractive premium for ITMN shareholders and outright convertible holders. At today’s prices, outright convertible holders have gained about 54% from the price at the time of our August 11 note, better than 85% of the stock’s gain.
While we don’t expect winners like this often, it does show the benefit of holding some low-premium bonds when there’s a compelling reason to think the stock can go appreciably higher, and of considering a “barbell” approach rather than focusing on bonds concentrated in the dangerous 120-130 zone.