TearLab (TEAR) – Merger Arbitrage – 15% Upside

Current Price: $0.0511

Offer Price: $0.0586

Upside: 15%

Expected Closing: beginning of June, 2020

Merger Agreement

 

Liquidity is limited.

On the 11th of May eye diagnostics company TearLab agreed to merge with health technology fund Accelmed Partners II (ref. AP) for $0.0586/share in cash (total consideration amount ~$736k). Shareholder approval has already been received and there seems to be no further major hurdles left.

AP has also agreed to invest $25m over two tranches, which will be triggered by delisting of TEAR and the company's senior lender, CRG, agreeing to restructure terms of the loan. The amendment agreement with a lender has already been made.

So overall, the buyer looks credible and it seems that the transaction should close shortly. Relatively large termination fee ($500k) is also somewhat reassuring here.

The opportunity likely exists simply due to the size of the company/transaction.

 

Accelmed

The buyer is a part of the Accelmed global group of funds that together manages $300m and specializes in small HealthTech companies. Their website states:

We are looking to partner with companies that have significant commercial infrastructure (>$20M LTM Revenue), an existing customer base and established sales channels, but that may lack new products and growth, and are interested in scaling and growing their businesses by gaining access to innovative products and growth capital. Accelmed Partners targets equity investments of $10-50M per transaction.

According to Crunchbase Accelmed has made over 20 investments/acquisitions with the most recent one being BioProtect in Jan'20.

Accelmed Partners II fund is the newest fund of the group, which conducted a $400m offering in March'20 (results are not clear).

 

TearLab

The target company seems to fit into the Accelmed's acquisition strategy.

TEAR is focused on commercializing its proprietary tear testing platform, the TearLab® Osmolarity System that enables eye care practitioners to test for Dry Eye Disease. Currently their system is sold in 40 countries (direct in US and through distributors in EU). The company consistently generates revenue above $20m, but despite that, it is not profitable and struggles to grow (revenue shrank by 7% on avg. for the last 3 years).

 

 

4 COMMENTS

  1. Writser

    Despite no vote being required they still have to distribute an information statement to shareholders. A preliminary has been filed a week ago:

    “The Merger will not be completed until at least 20 calendar days after the date this information statement is mailed to TearLab stockholders.”. So, it will take at least another month or something like that.

    Also of note is that Covid-19 is explicitly mentioned as a valid excuse to back out of the deal (subject to a payment of $500k).

    “Additionally, Buyer will have the right to terminate the Merger Agreement under certain circumstances in connection with its due diligence findings or, subject to the payment to the Company of a termination fee of $500,000, if Buyer determines that, as a result of the COVID-19 pandemic, the transactions contemplated by the Merger Agreement have become impracticable.”

    So, this is not exactly a watertight contract. Still, I think that’s a minor risk, given the value of the equity and the fact that the deal was struck in May.

  2. Michael Lax

    Thank you, Ilja. I was able to accumulate a small position in the shares.

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