A key opinion expected any day now from a corporate governance consultant could tip the balance in one of the most closely watched acquisitions of the year—pharmaceutical giant Bristol-Myers Squibb ’s (BMY) $74 billion deal for biotech company Celgene (CELG).
Whether the deal, which has been challenged by two major Bristol-Myers shareholders, actually closes has been tough to predict. That’s why Celgene is trading well below the implied deal price.
The deal gives Celgene holders $50 in cash and one Bristol share in exchange for each Celgene share, which would be worth a total of $97.84 at Thursday’s closing price. With Celgene closing at $87.45, that represents a gap of more than $10.
The market is implying a 70% to 75% chance of success for the deal, “which is a very wide spread and a very low market-implied likelihood of success for a high quality strategic transaction like this involving two very large companies,” Roy Behren, co-portfolio manager of the Merger Fund (MERFX), tells Barron’s.
Behren’s fund invests in companies between the time a deal is announced and when it is completed, trying to make money off the spread between the stock price and the deal price.
Institutional Shareholder Services, the third-party organization that advises shareholders on corporate governance and other issues, is likely to issue an opinion on the deal in the next few days. It tends to issue opinions 14 calendar days before a shareholder meeting, and Bristol-Myers shareholders are expected to vote April 12.
An ISS representative did not have a specific date for when it expects to issue the opinion. Behren thinks between 7% and 14% of Bristol-Myers shareholders are definitely against the deal, but that the ISS opinion will be a major determinant of whether others join the “no” camp.
“The thinking is ISS is going to come out anywhere from Friday to Monday or Tuesday on this,” says Behren. “It would not be fatal to the deal if ISS comes out against it, but it would reduce the odds of getting the shareholder vote because many people just follow whatever ISS says. If you do that, you don’t get sued as an index fund or as a passive manager.”
Behren is betting that the deal gets the go-ahead from ISS.
“My own view is that Bristol-Myers management followed a strict process,” he says. “They hired bankers, they hired lawyers, and they discharged their fiduciary duty properly in deciding what was best for the company.”
Starboard Value, an activist hedge fund and Bristol-Myers shareholder, has called the deal “a highly risky and likely value-destructive acquisition.” Bristol-Myers has argued that the deal makes strategic sense and is financially prudent.
Wellington Management, one of Bristol-Myers’ largest shareholders, also opposes the deal.
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For people who bet on mergers, it’s the kind of battle that opens up big opportunities but can also cause some heartburn.
“It’s definitely an exciting moment, and it is a once-in-a-year thing, but it’s tough for us to be really huge in it because of the fact that you do have this uncertainty,” Behren says. “Once ISS rules you probably see this spread trade in to about $5 [from over $10] if they recommend in favor of voting for it.
“If ISS recommended against it, it doesn’t mean it’s game over. It just means that the parties are going to come out publicly and lobby even harder for their respective sides. So the deal may still close even with that.”
Write to Avi Salzman at avi.salzman@barrons.com
https://www.barrons.com/articles/bristol-myers-celgene-deal-is-about-to-face-a-crucial-test-51553857200
2019-03-29 11:04:28Z
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