Current Price – $7.61
Acquisition Price – $8 in cash
Upside – 5%
Expiration Date – TBD (expected mid 2019)
This idea was shared by Ilja.
DNA sequencing machine maker Illumina is acquiring biotechnology company Pacific Biosciences for $8 in cash per share. The acquisition has been approved by both boards and is still subject to regulatory as well as PACB shareholder approvals. The later condition shouldn’t present any challenges as more than 50% of the votes are owned by insiders and 6 largest shareholders who have raised no objections so far one month after the announcement. Regulatory approvals are likely to pass as well, due to different technologies both companies are working on (meaning not direct competitors).
I do not believe Illumina is likely to walk away from the transaction as this is a relatively small (albeit the largest so far) acquisition for them ($40bn vs $1bn market caps). Also termination fee stands at $43m. The main reason for the spread is time left till expected closure (6+ months) as well as somewhat uncertain regulatory approval.
Illumina is $40bn DNA sequencing company, which has such people as Jeff Bezos and Bill Gates on its investor list. ILMN focuses on “short read” technology - reading short pieces of DNA and assembling them, however it has certain shortcomings, that are covered by “long read” technology, which is provided by PACB. Long read is much more expensive, however the recent breakthrough in Pacific’s technology and their newest chip that should be released next year is expected to significantly reduce the costs. Illumina commented on this in the most recent call:
The biggest driver around the timing, frankly the exciting innovations that have come out of PacBio over the past few months, and that are planned to come out over the next year… They’ve been able to dramatically improve the accuracy of their offering as well as the total output of their sequencer.
This interview/PR with the Illumina CEO provides further insights into the rationale behind the merger.
Although PACB previously had struggles with delivering their promises on time (the company had some delays when introducing the first version of the chip in the previous years), the CEO of Pacific stated that this time the launch of their newest chip is conservatively planned and Illumina added that after going through the target company’s roadmap and spending the few last weeks looking deeply into PACB technology, they feel comfortable about the future.I am not an expert on biotechnology, but if an industry leader - $40bn company says they want to buy it, that is good enough argument for me.
This is the largest deal so far for Illumina and it packs a high 79% premium to the last closing price of PACB. Pacific Biosciences has been burning $86m on average each year since 2010 and relies on continued equity issuances to support operations. At the end of last quarter the company had just over $15m left on its balance sheet. So in the absence of takeover either sales would need to pick-up fast (newly developed technology could be catalyst for that) or additional funding would be necessary.
It is not clear if any other parties have been interested in acquiring PACB and how competitive the bidding process was as the proxy has not been published yet.
PACB shareholder approval is very likely
Since there has been almost a month after the announcement and no objections have been received so far I am assuming, that main institutional shareholders will vote in favor of the deal. 5 largest shareholders (excluding index fonds) own 32% (end of Q3 figures). Insiders have another 13.4%.
Magnetar Financial (hedge fund) has recently acquired over 6% of PACB. Despite having a shady history with the CDO crisis 10 years ago, they have an excellent track record of investing into M&As. Since mid 2016 they have invested into 14 mergers of which 9 have successfully closed and 5 (3 of them including PACB are quite new, other 2 are working on regulatory approvals) are still in the process.
So if we take top 5 institutional holders, Magnetar and insiders, we already have more than 50% of the votes.
This is probably the main concern and the reason it might take up to mid 2019 for this transaction to close. When asked to comment about this in a recent call, Illumina has not given any clear answers except that they are working on it and noted that ILMN operates in short read segment while PACB - in long read. Having this in mind, I expect there to be no major problems with regulatory approvals.
Previous Illumina acquisitions
This is the largest acquisition for Illumina, however by far not the first one. Unfortunately, I was unable to track down any other interesting information about the previous mergers as in regards to that, the company is not sharing much in their press releases. Anyway, I suppose that after the previous 12 acquisitions the management should have enough experience to close this one out.