McKesson (MCK) – Split-Off – $1200 Upside

Current Price –$163

Offer Price – $175

Upside – 7.53% or $1200 for Odd Lot holders

Expiration date – 9th of March, 2020

SEC Filling

 

Split-off transaction of which a few have been posted on the site already (DHR/NVSTLLY/ELANFTV/AIMCCBS/ETMPG/COTY and LMT/LDOS). I recommend reading through those and examining share price behavior of involved companies during and after the tenders to familiarize yourselves with risks involved in this kind of transactions.

In short, every $100 of McKesson (MCK) stock accepted in the tender will be converted into $107.53 of Change Healthcare (CHNG) stock subject to the upper limit of 11.4086 shares of CHNG per MCK share. Tender will expire on the 9th of March 2020 and exact exchange ratio will be determined couple days before that. Odd lot tenders will be accepted on priority basis. At the moment there is some borrow (at 14% rate on IB) for CHNG stock to hedge the position. Entering the trade closer to tender expiration might turn out to be less risky and more profitable (case by case situation, so hard to determine in advance).

Important points / risks to consider (very similar to other split-offs):

  • Offer will be heavily oversubscribed. As only 8% of MCK shares will be exchanged in the split-off and upside is quite significant, the offer will surely be oversubscribed. In the DHR/NVST transaction 42% of all outstanding shares were submitted in the tender and I would expect similar outcome this time. So proration will probably be around 15%-20%.
  • Odd-lot holders (less than 100 shares) will be exempt from proration. This provision has never been cancelled in split-off transactions so far. But with the odd-lot plays getting more popular, the priority treatment might get eliminated eventually.
  • Tight borrow. CHNG borrow might disappear and is likely to get even more expensive. Some hedged positions might be forced to buy in. CHNG sharecount will double as a result of this split-off and eventually arbitrageurs might run out of CHNG shares to borrow.
  • Timing. Entering this trade closer to expiration and having unhedged MCK position might pay-off better. However, part or all of the upside might be gone till then. Also worth noting that MCK trades at all time highs and has already jumped 4% upon split-off announcement.
  • Upper limit. Transaction is subject to upper limit of 11.4086 CHNG shares per share of MCK. At current prices the exchange ratio (at 11.13) is slightly below the upper limit. If the spread widens (i.e. MCK gets more expensive and CHNG gets cheaper) till/during valuation dates, the final pay-off might be less than 7.5% or get eliminated altogether.
  • Valuation dates. Final exchange ratio will be determined based on the VWAPs on the 3rd, 4th and 5th of March, so one might wait till then to enter the position (IB deadline for tendering is usually noon on the expiration date). Keep in mind that due to upper limit on the exchange ratio, upside might be reduced or eliminated till then.
  • CHNG to report quarterly results on 12th of Feb and it might affect the share price. McKesson reported earnings recently (4th of Feb).

31 COMMENTS

  1. lyjgeorge

    mck will have a divident on Mar 2? Will it affect some calculation of this split-off?

  2. Aidan

    A lot of the potential profit wiped out in the last two days with the market down. Might be wise to wait until close to expiration date? Other thoughts?

  3. K.Simon

    Any thoughts on the tender being cancelled due to recent market fluctuations due to coronavirus fears?

    1. Platitudes

      @K.Simon I think the condition you may be asking about is the following:

      “a decline of at least 15% in the closing level of either the Dow Jones U.S. Healthcare Index or the Standard & Poor’s 500 Index from the closing level established as of the close of trading on the trading day immediately prior to the date of this document;”

      p. 136 under “Conditions for Consummation of the Distribution”
      https://www.sec.gov/Archives/edgar/data/1756497/000119312520023378/0001193125-20-023378-index.htm

      Hope that helps

  4. Ben

    From the offer:
    “a decline of at least 15% in the closing level of either the Dow Jones U.S. Healthcare Index or the Standard & Poor’s 500 Index from the closing level established as of the close of trading on the trading day immediately prior to the commencement of the exchange offer;”

    DJUSHC Feb 7 Closing: 1,113.03
    DJUSHC Feb 25 Closing: 1,052.20 (-5.5% changed since day prior to commencement)

    GSPC Feb 7 Closing: 3,327.71
    GSPC Feb 25 Closing: 3,128.21 (-6.0%)

    From the general market perspective we should be fine.

  5. blades

    Another condition from the offer “a material adverse change in the …… stock price of McKesson”

  6. Ilja

    Currently S&P 500 and Dow Jones Healthcare indexes are down 11% and 10% respectively since the offer annoucnement. According to the offer conditions the company might cancell the offer if the indexes fall below 15%. Nonethless, in the last 7 years there have been no examples of a split-off transaction getting cancelled.

    1. fishwithwings

      These are some other conditions:

      a material adverse change in the business, prospects, condition (financial or other), results of operations or stock price of the Joint Venture or Change;


      a material adverse change in the business, prospects, condition (financial or other), results of operations or stock price of McKesson; and


      a market disruption event occurs with respect to McKesson Common Stock or Change Common Stock and such market disruption event has, in McKesson’s reasonable judgment, impaired the benefits of the exchange offer.

  7. Random Deals

    Even if the indexes fall below 15%, will it be in the interest of the company to cancel the offer?

    1. leoc00

      they probably don’t care as long as the ratio between MCK/CHNG gets really out of whack and not enough people tender. It’s not like MCK is paying anything out of pocket to complete the spinoff.

  8. Michael Lax

    when in the last possible time to buy MCK, given IB as the broker?

    1. leoc00

      it varies, but 2 trading days before expiration is safe 99% of the time

      1. nostradamus

        IB lets you tender until the last minute, so next Monday morning.

  9. jwestern

    I screwed up the hedge by not buying enough puts. So now I have a large position in CHNG at the current price of ~$10.80 vs my break-even $13. Does anybody have strong opinions about the CHNG’s value proposition? I read the most recent VIC write-up, and it seems it’s currently extremely cheap (~1.7x EBITDA/EV).

    1. Dan Silverstein

      Isn’t estimated EBIDTA about $980 million? Debt=$4.9 billion. Share count=325 million. At a stock price of $9.50/share (not sure where it will trade today)
      doesn’t that mean EV is close to $8 billion? That works out to EV/EBITDA of about 8.

      1. Anuj Kumar

        8x EBITDA is about where I’m calculating as well. Jwestern may not be using the pro forma information. The original company’s structure was confusing

      2. jwestern

        Ah, I confused Change Healthcare Inc. and Change Healthcare LLC. Thank you for clarifying.

  10. dt

    Today’s sell-off CHNG seems excessive and most probably related to dumping of split-off shares that were received yesterday/today. Especially with S$P already up 5% for the day.
    Seems like a true technical sell-off (albeit software for healthcare industry business is the ‘too difficult pile’ for me, so I might be missing something).

    1. dt

      And obviously it might continue for quite some time as 175m of new shares were issued compared to 20m daily volume over the last two days.

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