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We featured a couple of mergers arbitrage opportunities worth exploring for premium members last month that had spreads of nearly 4% and one of those deals, the all-cash acquisition of AveXis (AVXS) by Novartis (NVS), closed last week just 37 days after the deal was announced. The second opportunity we highlighted, the acquisition of WGL Holdings (WGL) by AltaGas, has also seen its spread narrow considerably. With cash freeing up from the AVXS deal and potentially from the WGL deal in the future, I was looking for new opportunities and found something that really stood out. At the surface it looked like the type of opportunity that comes along once every few years where the downside is potentially limited while the upside is disproportionately large. I decided to spend some time on it over the last few days and have shared the results of my research in this exclusive post for premium members.
The acquisition of medical devices company SteadyMed (STDY) by United Therapeutics (UTHR) caught my attention because the deal included a kicker in the form of a heavily discounted contingent value right (CVR) and because United Therapeutics is an innovative company that I wrote a focus article on several years ago. The $216 million deal is structured to pay SteadyMed investors $4.46 per share in cash and an additional $2.63 per share in cash upon the achievement of a milestone related to the commercialization of SteadyMed’s lead product Trevyent®. The stock currently trades at $4.60, with the market valuing the additional $2.63 payment at approximately 14 cents. The reason I use the word approximately is because we are assuming the deal closes on time and we have not taken the time value of money into consideration.
Contingent Value Rights (CVRs) and Why They Trade at a Discount
I discussed another special situation that included a CVR in the article Tobira Therapeutics Hits The Jackpot and Provides a Nice Kicker where I wrote the following,
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.