Exactech (EXAC) – M&A Bidding War – 10%+ upside

Current Price – $50.55

Buyout Price –  $55+ (if higher bid appears)

Upside – TBD (expected at least 10%)

Expiration Date – Q1 2018

Merger agreement

This opportunity was suggested by Daniel

 

This is a fairly simple idea. Back in October Exactech signed an agreement to be acquired by private equity group TPG Capital at $42/share in cash. However, a competing (non-binding) bid emerged from an undisclosed private equity party at $49/share, which forced TPG Capital to increase its offer to the current $49.25.

So the trade here is to buy EXAC with expectation that the undisclosed party will continue bidding on the company. If this does not materialize then EXAC will be acquired at $49.25, which would be a loss of 2.5%.

The risk of the deal getting cancelled outright is very low – there are two interested parties and management with 25%+ ownership supporting the merger and rolling over their equity stakes.

 

Few more notes:

• Gabelli and his funds acquired 13% stake in EXAC with significant buying after the initial merger agreement ($42/share) was signed. My guess is they expected this bidding war.
• Party A expressed interest in EXAC already back in March 2017 and EXAC business is complimentary with one of Party A holdings:

“In March 2017, representatives of a non-U.S. private equity firm and one of its portfolio companies which conducts orthopaedic implant device operations – whom we refer to collectively as “Party A” – met with the Company’s Executive Chairman, Chief Executive Officer and certain other of the Company’s executives at the Company’s principal offices in Gainesville, Florida to discuss a possible combination of the businesses of the Company and Party A. Later in March 2017, the Company’s Chief Executive Officer and Chief Financial Officer met with representatives of Party A in San Diego, California to further discuss a possible combination of the businesses of the Company and Party A. Although general discussion ensued about how Party A’s business and the Company’s business were complementary in certain respects, no non-public Company information was exchanged with Party A and neither the structure for nor terms of a possible transaction were ever discussed. Intermittently over the following couple of months, representatives of Party A contacted the Company’s Executive Chairman and Chief Executive Officer via e-mail to seek to resume the general discussions that occurred in late-March but no further meetings or discussions took place. Party A was informed in June 2017 that the Company was not for sale“

• For some reason management agreed with “No Shop” provision even-though the offers differed only slightly – $41.25 for ‘go-shop’ vs $42 for ‘no-shop’. So it seems that TPGs offer was designed to go through without competition at lower price.
• Management has vested interest in joining with TPG. They have 26% ownership and have agreed to rollover their equity, i.e. they will not receive cash consideration but will rather receive new shares. I take it as a hint that management and founders believe EXAC is worth more than $49.25/share.
• There is a termination fee of $26m if the agreement with TPG is broken. Party A has already agreed to cover the termination fee under previous agreement that was proportionally lower.
• $49.25/share is more than 100% higher relative to where EXAC used to trade in recent years.
• Company hardly generates any FCF  and shows only mild revenue growth (2%-4%).