Merger Arbitrage Mondays – Oracle Enters Healthcare Tech With The Cerner Acquisition

Merger activity declined last week with four new deals announced and four deals completed. Two of the four new deals announced were successful deals in the works.

Founded in 1979 and headquartered in North Kansas City, Missouri, Cerner Corporation (CERN) is a healthcare information technology company. Cerner is one of the leading electronic health record (EHR) system providers in the world. The other behemoth in this space is a private company called Epic Systems based in rural Wisconsin whose software stores information about nearly 50% of U.S. patients. The New York Times did a great job covering this unusual company in a 2018 article called Willy Wonka and the Medical Software Factory. EHRs are complex systems that are tightly integrated with various third party systems including pharmacies and labs like the ones run by Quest Diagnostics (DGX) and Labcorp (LH). Installing or upgrading an EHR is a major undertaking and the Department of Veterans Affairs is expected to spend over $16 billion upgrading its EHR system during the next 10 years. I wrote briefly about another EHR vendor, NextGen Healthcare (NXGN) in an article titled NextGen At A Crossroads a couple of months ago and I have had first hand experience with a rather challenging EHR implementation.

It is not surprising that most tech behemoths are content to leave the complex world of EHR software and all the regulatory issues they encompass to the Epic Systems and Cerners of the world. I view this acquisition of Cerner by Oracle (ORCL) as a net negative for Oracle shareholders considering how challenging the integration of the company is likely to be, Cerner’s low net margins compared to most software companies and its anemic low-single digit revenue growth rate. The only silver lining is that despite the size of the deal ($28.4 billion including debt), it represents less than 10% Oracle’s enterprise value of $296 billion. Oracle already has $55 billion in net debt on its balance sheet and this deal will leave it even more indebted. In the words of Peter Lynch, this is a classic case of “diworsification” and it is not surprising that Oracle’s shares have been heading lower since the deal was announced.

We added CERN as a potential deal in the works on December 16, 2021, when The Wall Street Journal reported that Oracle (ORCL) was in talks to buy electronic-medical-records company Cerner (CERN). CERN’s price after this media report was $89.77. The deal materialized early last week as a $95 per share all cash deal.

You can find all the active deals listed below in our Merger Arbitrage Tool (MAT) that automatically updates itself during market hours.

There were three new deals announced in the Deals in the Works section last week.

SPAC Arbitrage

There were 5 SPAC IPOs filed and 7 new SPAC business combinations announced last week. You can find the new SPAC IPO announcements in our SPACs tool here.

  1. ZeroFox, an enterprise software-as-a-service (Saas) leader in external cybersecurity, and L&F Acquisition Corp. (LNFA) announced that they have entered into a definitive agreement for a business combination.
  2. Forafric, a vertically integrated agribusiness serving North Africa, and Globis Acquisition Corp. (GLAQ) have entered into a definitive business combination agreement.
  3. Mondee Inc. entered into a business combination agreement with ITHAX Acquisition Corp. (ITHX).
  4. Senti Biosciences, Inc., a Circuit company, and Dynamics Special Purpose Corp. (DYNS) have entered into a definitive business combination agreement to create a public company focused on Gene Circuit-engineered cell and gene therapies.
  5. Eve UAM, LLC has entered into a definitive business combination agreement with Zanite Acquisition Corp. (ZNTE).
  6. Gorilla Technology Group Inc., an edge artificial intelligence company for security and other applications, and Global SPAC Partners Co. (GLSPT)  announced that they have entered into a business combination agreement.
  7.  Blackstone Products, an innovative and design-driven company that is redefining the outdoor cooking experience with griddle cooking appliances and accessories, and Ackrell SPAC Partners I Co. (ACKIU) announced that they have entered into a definitive business combination agreement.

Weekly Spread Changes:

The table below shows weekly spread changes between December 17 and December 24, 2021.

Symbol Quote Acquiring
Company
Acquiring
Company Quote
Current
Spread
Last Week
Spread
Spread Change
Weekly
Deal
Type
LEVL 38.88 First Merchants Corporation (FRME) 41.19 2.09% 0.18% 1.91% Cash Plus Stock
FVCB 19.95 Blue Ridge Bankshares, Inc. (BRBS) 17.83 2.71% 0.88% 1.83% All Stock
SAFM 187.5 Cargill and Continental Grain Company (N/A) 8.27% 6.62% 1.65% All Cash
ESBK 22.82 Community Bank System, Inc. (CBU) 74.17 1.23% 0.22% 1.01% All Cash
ARNA 91.23 Pfizer Inc. (PFE) 58.71 9.61% 8.93% 0.68% All Cash
SJR 29.71 Rogers Communications Inc. (RCI) 46.8 9.05% 11.57% -2.52% Special Conditions
CHNG 21.35 UnitedHealth Group Incorporated (UNH) 495.38 20.61% 23.26% -2.65% All Cash
MILE 2.38 Lemonade (LMND) 45.66 0.91% 4.03% -3.12% All Stock
MNTV 20.75 Zendesk (ZEN) 103.35 12.07% 15.23% -3.16% All Stock
NES 2.01 Select Energy Services, Inc. (WTTR) 6.23 -20.93% 0.00% -20.93% All Stock

Deal Statistics:

Total Number of Deals Closed in 2021 194
Total Number of Deals Not Completed in 2021 16
Total Number of Pending Deals
Cash Deals 45
Stock Deals 29
Stock & Cash Deals 7
Special Conditions 6
Total Number of Pending Deals 87
Total Deal Size $1086.90875 billion

New Deals:

  1. The acquisition of Bluerock Residential Growth REIT (BRG) by Blackstone Real Estate for $3.6 billion or $24.25 per share in cash. We added BRG as a potential deal to the Deals in the Works section on September 16, 2021, and the price after the news of the potential deal came out was $11.10. Prior to the Acquisition, the Company separately intends to spin off its single-family rental business to its shareholders through the taxable distribution to shareholders of all of the outstanding shares of common stock of a newly formed real estate investment trust named Bluerock Homes Trust, Inc. (“BHOM”). The Company’s shareholders will receive shares of BHOM, with a current implied Net Asset Value estimated at $5.60 (based on the midpoint of the valuation range provided by Duff & Phelps, independent financial advisor to the Company’s board of directors), for each share of Company common stock. We are treating this as a special conditions deal by adding the spinoff value of $5.60 to the deal price to more accurately reflect what the shareholders will receive after the deal is completed.
  2. The acquisition of BP Midstream Partners (BPMP) by BP p.l.c. (BP) for $2.45 billion in an all stock deal. Under the terms of the agreement, each BPMP unitholder of the Public Common Units would receive 0.575 of an American Depositary Share of bp in exchange for each Public Common Unit owned.
  3. The acquisition of Cerner Corporation (CERN) by Oracle Corporation (ORCL) for $28.4 billion or $95 per share in cash. We added CERN as a potential deal to the Deals in the Works section on December 16, 2021, and the price after the news of the potential deal came out was $89.77.
  4. The acquisition of Ortho Clinical Diagnostics Holdings (OCDX) by Quidel Corporation (QDEL) for $8.33 billion in a cash plus stock deal. Under the terms of the agreement, Ortho shareholders will receive $7.14 in cash per common share and 0.1055 shares of common stock in the combined company for each Ortho common share.

Deal Updates:

  1. On December 16, 2021, The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), expired in connection with the previously announced proposed merger between Rogers Corporation (ROG) and DuPont de Nemours (DD).
  2. On December 20, 2021, Webster Financial Corporation (WBS) and Sterling Bancorp (STL) jointly announced that Webster has received regulatory approval from the Board of Governors of the Federal Reserve System to complete the previously announced merger between the two companies. As previously announced, the Office of the Comptroller of the Currency has also approved the merger of the respective bank subsidiaries of Webster and Sterling, Webster Bank, National Association and Sterling National Bank. All required regulatory approvals to complete the merger have now been received.
  3. On December 20, 2021, Sanderson Farms (SAFM) and Cargill and Continental Grain Company each received a request for additional information and documentary material from the DOJ in connection with the DOJ’s review of the transaction contemplated by the Merger Agreement. Issuance of the Second Request extends the waiting period under the HSR Act until 30 days after both the Company and Parent have substantially complied with the Second Request, unless the waiting period is terminated earlier by the DOJ or extended by agreement of the Company and Parent.
  4. On December 20, 2021, WSFS Financial Corporation (WSFS) and Bryn Mawr Bank Corporation (BMTC) jointly announced that WSFS has received all required approvals to acquire BMTC. The acquisition is expected to close on January 1, 2022.
  5. On December 21, 2021, shareholders of Athene Holding (ATHapproved the company’s merger with Apollo Global Management (APO) at a special meeting of shareholders.
  6. First Interstate BancSystem (FIBK) and Great Western Bancorp (GWB) jointly announced that they have received the required regulatory clearances from the Board of Governors of the Federal Reserve System and the Montana Division of Banking and Financial Institutions related to the proposed merger of FIBK and GWB and the merger of FIBK’s and GWB’s respective subsidiary banks, First Interstate Bank and Great Western Bank.
  7. On December 24, 2021, The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), expired in connection with the previously announced proposed merger between Dicerna Pharmaceuticals (DRNA) and Novo Nordisk (NVO).

Closed Deals:

  1. The acquisition of Dover Motorsports (DVD) by Speedway Motorsports on December 22, 2021. It took 43 days for this deal to be completed.
  2. The acquisition of Goodrich Petroleum Corporation (GDP) by Paloma Partners VI Holdings on December 23, 2021.
  3. The acquisition of Zix Corporation (ZIXI) by OpenText on December 23, 2021. It took 45 days for this deal to be completed.
  4. The acquisition of Landmark Infrastructure Partners (LMRK) by Landmark Dividend on December 22, 2021. It took 121 days for this deal to be completed.

Top 10 deals with largest spreads:

Symbol Announced
Date
Acquiring
Company
Closing
Price
Last
Price
Closing
Date
Profit Annualized
Profit
JOBS 06/21/2021 Garnet Faith Limited (N/A) $79.05 $47.6 12/31/2021 66.07% 4823.21%
TMX 12/14/2021 Rentokil Initial plc (RTOKY) $55.00 $44.35 12/31/2022 24.01% 23.69%
CHNG 01/06/2021 UnitedHealth Group Incorporated (UNH) $25.75 $21.35 06/30/2022 20.61% 40.44%
XLNX 10/27/2020 Advanced Micro Devices, Inc. (AMD) $251.86 $216.11 12/31/2021 16.54% 1207.52%
MNTV 10/28/2021 Zendesk (ZEN) $23.25 $20.75 06/30/2022 12.07% 23.68%
PNM 10/21/2020 Avangrid, Inc. (AGR) $50.30 $45.07 12/31/2021 11.60% 847.10%
AJRD 12/20/2020 Lockheed Martin Corporation (LMT) $51.00 $45.88 03/31/2022 11.16% 42.88%
ARNA 12/13/2021 Pfizer Inc. (PFE) $100.00 $91.23 06/30/2022 9.61% 18.86%
SJR 03/15/2021 Rogers Communications Inc. (RCI) $32.40 $29.71 06/30/2022 9.05% 17.77%
SAFM 08/09/2021 Cargill and Continental Grain Company (N/A) $203.00 $187.5 01/31/2022 8.27% 83.81%

List of all pending deals:

The list of all pending deals is only available to InsideArbitrage Premium and Plus members.

Conclusion:

One of the biggest tech deals was announced last week as we come close to the end of the year. If it hadn’t been for Larry Ellison’s greater than 40% ownership of Oracle, the deal for Cerner could have run into shareholder resistance. The spread on the Cerner deal is 3.44% or 3.4% annualized if it closes by December 2022, indicating that the market thinks the deal will go through. Activity on the SPAC front slowed down last week with only 5 new SPAC IPOs filed. SPAC business combinations continued to grow with 7 new combinations announced last week.

Disclaimer: I have long positions in Nuance Communications (NUAN), Change Healthcare (CHNG) and Pfizer (PFE). I also have put options in Change Healthcare. Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.

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