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In our last Merger Arbitrage Mondays post we briefly mentioned the acquisition of Tobira Therapeutics (TBRA) by Allergan (AGN) where Allergan paid a huge premium to acquire Tobira and the stock skyrocketed 721% in response. Shareholders of Tobira would receive $28.35 in cash upon completion of the acquisition. The deal also includes a Contingent Value Right (CVR) that could pay up to $49.84 per share if certain conditions are met. Considering the “potential” deal value is $78.19, why is the stock trading at $38.99? I have attempted to answer this question in this article and have also shared a model I used to determine the value of this deal.
For the most part, I like the KISS (Keep It Simple Stupid) principle when it comes to investing and try to avoid “black box” investments where the investment is challenging to analyze. However I do sometimes make an exception to this rule and especially when it comes to merger arbitrage. The acquisition of the North American operations of the bottling company Coca-Cola Enterprises (CCE) by The Coca-Cola Company (KO) was one such case and I wrote a special report about it several years ago. Sometimes the more complex deals provide an opportunity that may not exist with the simple deals provided you understand the risks associated with the situation.
I have invested in situations that included a CVR as a kicker, where investors get one or more additional payments in the future if certain milestones are met after the closing of the deal. These kinds of CVRs are often seen in pharma/biotech types of deals where the company being acquired has drugs in their pipeline that could get approved long after the deal has closed. I have also seen CVRs attached to the disposal of real estate in deals such as the acquisition of Safeway by Cerberus Capital Management. I have participated in some of these deals that include CVRs because the merger spread in those deals were sufficient to make the CVR almost free.
This is not the case for Tobira because the cash portion of the deal ($28.35) is dwarfed by the CVR ($49.84) and the current price of Tobira ($38.99) indicates the market is assigning a value of approximately $10.64 to the CVR. This 8-K filing lists the conditions associated with the CVR as given below:
Each CVR represents the right to receive the following cash payments, without interest and less any applicable withholding taxes, with each payment conditioned upon the achievement of certain milestones as follows: