Merger Arbitrage – 13% Upside
This is a tiny and quirky international merger of two rapid diagnostic test makers. The average daily trading volume for the target is c. 200k. Chembio Diagnostics ($13m market cap) is getting acquired by French peer Biosynex (ALBIO.PA, $113m) for $0.45/share in cash. The acquisition is conducted through a tender offer and participation from at least 50% of CEMI shareholders is required. The tender was announced in February and was supposed to expire on March 14. This seemed like a done deal and the spread fluctuated around 0%-2% until mid-March when the companies announced that only 34.5% of outstanding shares have been tendered. The spread blew up to 30% as investors got scared that the merger won’t go through. The tender has been extended till March 28.
The interesting thing is that CEMI shareholders do not seem to be opposing the merger. CEMI is basically on a brink of bankruptcy and this takeover is very clearly the last resort for the company. If the merger was to break, the share price would very likely tank heavily. This seems to be one of those cases where a positive corporate action is impeded by the passive retail investor base, which simply ignores the vote. In this sense, the setup is somewhat similar to the recently covered RHE case.
Nonetheless, given the very clear incentives to support the merger and the recently written CEO letter to shareholders (where he clearly outlines the rationale and potential bankruptcy in a no-deal scenario), I think management will eventually solicit a sufficient amount of votes to pass the participation threshold. As a reference, the participation in the three most recent shareholder meetings was active enough (54% in 2022, 63% in 2021, and 80% in 2020). This takeover is definitely a lot more importantt han the routine AGMs. However, if the merger breaks, the downside could be very substantial.
CEMI makes tests for sexually transmitted infections, respiratory viruses, fever, and tropical diseases. It operates in the US, Germany, Brazil, and Malaysia. The company has never been profitable and has been burning cash fast. Management thought it had finally found salvation in 2020 when the company switched all of its resources towards the development of test kits for COVID. CEMI even received approval from FDA in April’20, followed by a spike in the share price and public offering at $11.75/share. Two months later, in June’20, FDA suddenly revoked the approval. This caused a crash in the stock price and resulted in multiple litigations from shareholders. Since then the company has been facing constant liquidity issues. In 2022 CEMI was approached by its financial advisor, who said that the company is unlikely to generate enough cash to repay the looming $19m debt maturity in September’23 and is facing potential bankruptcy as new financing means will likely be unavailable. CEMI’s lender has repeatedly refused to enter into any restructuring agreements and has been sending letters expressing concerns with CEMI’s financials. Management tried orchestrating another public offering, which eventually failed. Subsequently, a sale process was launched, however, the only other proposal the company received besides ALBIO’s valued CEMI at only $0.2-$0.3/share. Funnily enough, the other bidder (Party A) eventually walked away after expressing concerns about potential issues with shareholder approval due to the retail-focused shareholder base of CEMI. As of Q3’22, CEMI had $21m in gross cash vs $19m in short-term debt. The company is burning c. $3m-$4m per quarter. The debt matures in Sep’23, with the possibility of an earlier acceleration if CEMI does not meet the minimum total revenue covenant. Apparently, management expects to breach the covenant in this current quarter. In the recent letter to shareholders, the CEO clearly outlined that bankruptcy will follow promptly if the merger breaks.
This is a strategic transaction for ALBIO and I think the risk of the buyer walking away is low. The portfolios of both companies seem to be complementary. The buyer has stressed it sees significant synergies and cost savings from this transaction. ALBIO has been quite an active acquirer in the diagnostic test space in recent years, including acquisitions of Theradiag (completed in Jan’23), Avalun (May’21), and the human diagnostic business of Enalees (Jan’22).
38.5% tendered. Extended until the 12th of April:
https://www.sec.gov/Archives/edgar/data/1092662/000114036123014419/ny20007172x4_sctota.htm
Current stock price notwithstanding…seems unlikely they get this over the finish line, no?
They’ve added only about 1.47m shares from March 14 through March 28, definitely a much slower pace than expected. The risk is much higher now, especially considering the large downside. The offer needs 4.26m more shares to pass the threshold over the next 2 weeks which is probably unlikely and more extensions will be required. Importantly, according to the tender proxy, the buyer will be obliged to extend the tender offer just for one more time (3 in total) and any further extensions will be done only at the buyer’s own discretion.
By the way, CEMI released annual results as well and the cash dropped to $18.2m in Q4 vs $21m in Q3.
Anyone else taking the other side of this? Risk a penny or two to possibly make $0.40?
Is is possibe that the acquirer increases the offer price in order to get more shares tendered? If not, I find the short side of the trade at current price of 0.447 USD attractive. Why is the stock trading so close to the offer? What am I missing?
Indeed, interesting one. On the other hand, if you are already holding a big long position because you thought you could arb this, perhaps it is worthwhile to lift as much as possible and tender so it goes through ? Looking at the turnover past few days, I guess the others realize that as well ?
I don’t think the price is the issue here. Given the very likely bankruptcy in case the tender fails, shareholders are fully incentivized to do everything possible for this current offer to go through. The problem is that most small retail shareholders probably don’t even know about this tender and if management hasn’t been able to get the ‘votes’ through any other means, I don’t think raising the price would be of any help.
With only a tiny spread remaining, the short trade does look interesting. However, shorting a $16m market cap company sounds way too risky for me.
48.3% of CEMI shares have been tendered as of April 12. The offer was extended again to April 26. Looks like this time it should finally pass. I guess it explains why the spread has stayed at zero lately.