Repros Therapeutics (RPRX) – Merger Arbitrage – 8% upside

Current Price – $0.62

Buyout Price –  $0.67

Upside – 8%

Expiration Date – Q1 2018

Merger Announcement

This idea was suggested by Luke.

 

On 11th of December Repros Therapeutics agreed to be acquired by Allergan. The spread narrowed to 1% after the announcement and stayed at this level over the next week. The market seemed to think the deal is almost certain to close.

However, last Friday Repros reported that one of its drugs (imho the less important of the two) is likely to receive negative opinion from the European Medicines Agency (an FDA comparable in European Union). This caused stock to plummet to $0.61 in the early hours on Monday and later the price stabilized around $0.64. In the after-hours Repros traded $0.62.

Despite this negative announcement Allergan is unlikely to walk away from the transaction:

• Allergan has likely done their due diligence and knew that negative EMA opinion is a possibility;
• Repros is tiny ($25m cap relative to Allergan ($57bn cap). Allergan did not even bother to issue press release regarding this acquisition;
• Announcement relates to only one of the two drugs and only in one jurisdiction (European Union);
• Allergan is acquiring not only the drugs in development, but also research team any patents or other IP;
• Repros is being acquired at low price relative to its historical valuations – back in 2013-2015 the stock traded in $10-$20 range;
• In May 2017 Repros raised equity at $0.6/share, thus acquisition is happening at only small premium to this price;
• Repros is in a dire situation and running out of cash. Company burned through $8.5m in 9M of 2017 and had only $1.8m left as of Sep 2017. Thus my guess is that Repros was in a very weak negotiating position and Allergan got the assets on the cheap.

Timing: Allergan is due to announce tender offer for all outstanding shares of Repros (due by 27th of December). Assuming one month for the tender, the transaction is expected to close in January or beginning of February of 2018.

The spread will most likely narrow again to 1% after Allergan announces the tender this week or right after Christmas.

Repros shareholders are expected approve the acquisition (more than 50% need to tender) as company will be out of cash by the end of 2017 and in the absence of merger a dilutive equity offering would follow.

In the unlikely scenario that this merger fails, Repros will probably trade down significantly below the unaffected price, so losses of 50%+.