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With the acquisition of athenahealth (ATHN) by the private equity firm Veritas Capital and Elliott Management discussed in our last premium post closing a few weeks ago, I started looking for other opportunities and decided to dig deeper into the Celgene – Bristol-Myers deal. The deal has been widely discussed both because of the size of the deal and the large spread right from the get go. At an estimate deal value of $74 billion when announced and $95 billion after including Celgene’s (CELG) debt, this is the largest pharmaceutical deal ever. To show their commitment to the deal, the companies set the termination fee at $2.2 billion if either party walks away from the deal. Under the risk factors section of the proxy statement, the companies state,
“The merger agreement contains provisions that make it more difficult for Bristol-Myers Squibb and Celgene to pursue alternatives to the merger and may discourage other companies from trying to acquire Celgene for greater consideration than what Bristol-Myers Squibb has agreed to pay.”
Deal Terms and the CVR:
To reiterate the deal details that most of you are familiar with, Bristol-Myers (BMY) is offering $50 in cash and one share of BMY in a cash plus stock deal valued at $101.51 based on BMY’s closing price of $51.51 today. There is also a contingent value right (CVR) associated with the deal that could pay out $9 per share if all three goals specified in this section of the merger agreement are met. Considering two of these goals have to be achieved by December 31, 2020 and the third by March 31, 2021, the market is rightfully assigning a low probability to this CVR payout.
I have participated in several deals with CVRs and in some instances like the acquisition of Tobira Therapeutics by Allergan (AGN) that I discussed here, the CVRs did pay out handsomely and were structured to pay various amounts as each milestone was achieved. Assuming a 20% probability of the Celgene CVR paying out, we get an additional $1.80 for the CVRs. Discounting this payment back to current dollars using a 6% discount rate, I get $1.59 for the CVR. So the total deal value is approximately $103.10, providing a return of 20.27% based on Celgene’s price of $85.72 today. If the deal closes by the end of Q3 2019 as outlined in the press release announcing the deal on 1/3/2019, this translates into an annualized return of 35.74%.