Merger Arbs With Wide Spreads (July 2023)

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With another quarter in the books, I am refreshing my review of merger arbs with wide spreads. This post follows my previously published pieces in July’22, September’22, November’22, January’23 and April’23.

In this article you will find 17 merger arbitrage cases with my quick takes on the situations and reasons for the spread.

Some of these arbs have already been covered on SSI and have more detailed pitches – YI, CCHWF, and INFI/MEIP.

A printable PDF as well as full descriptions below.

Consolidation of two major US cannabis companies. The shareholder approval has already been received. The existing wide spread is explained by the deal break risk. The companies have so far been unable to complete divestitures and reach $300m in gross proceeds required by regulators. Since completing the first asset sales in Nov’22, CCHWF and CRLBF have not provided any updates on the divestiture process. Recently, the outside date for the merger closing (June 30) passed with no incremental information from the merger parties, however, an update is expected to be provided in the near-term. So far, CCHWF and CRLBF have seemed interested in pursuing the merger as indicated by the previous merger outside date extension from Mar’23 to Jun’23. The divestiture process has stalled due to failed attempts to pass the federal marijuana banking legislation which has had a negative impact on the sector’s short-term outlook. The Senate is expected to review the bill shortly, with several senators confident in its approval. Having said that, the bill has repeatedly come up in the Senate before only to be eventually dismissed, indicating that the same outcome might occur this time. Worth noting that the exchange ratio is subject to proration adjustment due to the legacy CCHWF earnout, the amount of which is unknown. The maximum earn-out would lower the exchange rate to 0.5180 and reduce the spread to 118%.

CCHWF was covered in Quick Pitches here and here.

 

Silicon Motion Technology (SIMO)

International merger in the semiconductor industry. Silicon Motion Technology, a supplier of NAND flash controllers for SSDs, is getting acquired by its US peer MaxLinear. Approval from China’s regulators is the main hurdle. The buyer is based in the U.S, while the target is a US-listed Taiwanese company with China being its largest market. Two Chinese semiconductor industry watchdogs have recently approved the transaction. While the blessing from the antitrust regulator SAMR is still pending, recent reports suggest that the transaction is close to clearing the key hurdle. The merger termination date is set to August 7.

 

Spirit Airlines (SAVE)

  • Buyers: JetBlue Airways (JBLU)
  • Consideration: JBLU: $31/share + $0.1 per month
  • Spread: 61%
  • Exp. Closing: H1’24
  • Main risk: Regulatory approval.

This is an airline merger facing difficulties on the regulatory front. In March, the DOJ filed a lawsuit against the merger, arguing it would be adverse to consumer prices and competition. In response, SAVE and JBLU have argued that the merger would increase competition to the four legacy carriers in the US and, to alleviate antitrust concerns, JBLU has proposed divestitures in overlapping areas. Moreover, both companies have reached agreements with pilots unions. So far, however, the offered concessions have clearly not appeased the regulators. The DOJ’s trial hearing date has been scheduled for October 16. The judge stated that he expects an expeditious trial, with a potential ruling by year-end. This should leave time to pursue an appeal if the court rules against the merger. Worth noting that a federal judge has recently blocked JBLU’s Northeast Alliance partnership with American Airlines (NEA) on antitrust grounds. Since the judge’s decision, JBLU has reiterated its commitment to the ongoing merger with SAVE and will now focus exclusively on it. NEA’s termination seems to be a positive as earlier reports suggested JBLU might trade away the NEA partnership for the SAVE merger.

 

Infinity Pharmaceuticals (INFI)

This is a tiny all-stock merger between two early-stage biopharmas. The transaction seems highly likely to be rejected by MEIP’s shareholders as indicated by the wide spread. The shareholder meeting is set for July 14. The merger comes at disastrous terms for the acquirer which is required to keep $80m in net cash vs $4m for INFI while giving away a c. 42% ownership of the combined entity to INFI’s equity holders. A number of MEIP’s shareholders have expressed their opposition to the ongoing merger. Anson Funds (owns 10%) has stated it will vote against the merger and recently in tandem with other equity holders made an offer to acquire MEIP which was rejected by the company’s management. MEIP currently trades at a 20% spread to the recent acquisition bid. MEIP’s shareholder base also includes a prominent biopharma investor Tang Capital (5%) which is also likely to oppose the merger with INFI. If/when the buyer’s shareholders reject the deal, a liquidation where the company might be worth materially above current share price levels seems to be the most likely outcome. MEIP’s management considered winding up the company during merger negotiations with INFI. Using the company’s own liquidation value estimates and adding incremental cash burn, MEIP might reasonably pay out c. $9/share in liquidating distributions vs the current share price of $6.67/share. Notably, proxy advisory firms ISS and Glass Lewis have recommended MEIP’s equity holders to support the INFI merger.

INFI/MEIP was covered in Quick Pitches here.

 

This is a cross-border acquisition in the semiconductor space – Intel is acquiring Tower Semiconductor. The merger will require numerous antitrust and foreign investment approvals, some of which have already been received. The transaction continues to be held up by the Chinese regulator SAMR, which has increased scrutiny of M&A in the strategically important semiconductor space. For the same reason, there is also uncertainty regarding Israel’s government approval. The markets has been increasingly skeptical of the transaction closing as indicated by the spread widening to as much as 50% in recent weeks as the termination date (August 15) is only a month away. Israeli withholding taxes will apply in case of successful closing – to avoid these foreign investors will be required to provide some paperwork, which might delay the eventual payout of the merger consideration and might explain part of the spread.

 

Desktop Metal (DM)

One of the leading 3D industry players Stratasys is acquiring its peer Desktop Metal. The transaction comes at a time of heightened consolidation in the 3D printing manufacturing space. Since the announcement of the merger, SSYS itself has received acquisition proposals from two industry peers Nano Dimension (NNDM) and 3D Systems (DDD) that were subsequently revised upwards. SSYS’s management has rejected the offers and continues to focus on the merger with DM. However, the market seemingly expects the current merger to break. The transaction comes at poor terms for the acquirer which would be forced to give up 41% ownership of the combined entity to a smaller, much more unprofitable and liquidity-issue facing DM. Moreover, NNDM’s holds large 14% stake in SSYS while another activist Donerail (2%) has also expressed opposition to the ongoing merger.

 

Amazon is acquiring a robot vacuum cleaner maker iRobot. The merger spread has gradually widened from minimal levels to over 30% due to regulatory hurdles and a potentially prolonged closing timeline. Several senators have been pushing the regulator FTC to block the transaction. The companies have received a second request from the FTC. The regulator has been rumored to file a lawsuit against the merger. The deal has also raised antitrust concerns internationally – The European Commission has launched a detailed probe into the transaction, with the ruling expected by Nov’23. Opposition’s concerns revolve around privacy infringements and Amazon’s history of anti-competitive acquisitions. Having said that, the UK’s CMA has recently cleared the transaction, arguing it will not lead to a substantial lessening in competition. Moreover, the buyer has reached a settlement with the FTC regarding privacy concerns related to its doorbell unit – a positive given the regulators’ concerns about Amazon’s previous privacy violations. Amazon’s another recent large acquisition of primary care provider One Medical has closed successfully.

 

Chinese pharmaceuticals distributor YI is getting taken private by management (92% voting power, 44% economic interest). Merger consideration is $3.61/share after deducting ADS fees. Special committee is still reviewing the offer. Chinese non-binding privatization offers are inherently risky. However, reputable management as well as the financing for the buyout by a government-controlled entity give confidence that this offer has a higher chance of closing. The privatization seems to have a quite strong rationale behind it as YI is seeking a listing on the Shanghai STAR Market and delisting from the US seems like a necessary step toward this process. As part of a post-IPO investment round, YI had agreed to redeem preferred equity interests if the STAR listing is not achieved by Jun’23. The company recently reached an agreement with the majority of post-IPO investors to extend the redemption deadline to Jun’24. While the management has not provided any material updates on the proposed privatization, the redemption adjournment might indicate that the management buyout is still in the cards.

YI is covered as a Portfolio Idea here.

 

Mortgage tech provider Black Knight is getting acquired by financial exchange and clearing house giant Intercontinental Exchange. Both companies each hold dominant market shares in specific US mortgage software segments – servicing (BKI) and origination (ICE). The FTC has filed a lawsuit to block the merger due to potentially lower competition in the loan origination software industry as well as in the pricing and eligibility engine (PPE) software market where BKI and ICE hold dominant positions. The regulatory pushback came despite the fact that merger parties recently agreed to divest BKI’s loan origination software business. However, the buyer remains confident in a successful litigation outcome. Along with the entry into a divestiture agreement, the companies have agreed to revise down the stock part of the merger consideration from 0.144 ICE to 0.0682.

 

Merger of two grocery store chains. The transaction is synergistic from a geographical perspective – management states that ACI operates in several parts of the country with very few or no Kroger stores. The main risk is antitrust approvals as the merger would combine the two biggest supermarket companies in the country, particularly in the Northwest where ACI and KR together hold a commanding market share. US senators as well as a couple of farmer and consumer groups have raised anticompetitive concerns to the FTC. The buyer KR has already received a second request from the regulator. A prominent labor union has also expressed opposition to the merger. However, both sides are confident of circumventing the regulatory hurdles with proposed divestitures of a large number of stores. The companies have started to look for buyers of stores in overlapping areas, with reported strong interest from potential acquirers.

 

FORG is getting acquired by PE firm Thoma Bravo. Target’s shareholders have already approved the transaction. The main risk is regulatory approval due to increasing market concentration in the identity access management (IAM) software space. The transaction follows Thoma Bravo acquiring two other players in the IAM software industry, including one of FORG’s direct peers. FORG and Thoma Bravo have received second requests from the DOJ. In February, transaction parties agreed to extend the merger review timeline to allow the regulator more time to review the transaction. Interestingly, the downside might be limited in case of a deal break – after agreeing to a deal with Thoma Bravo, FORG was approached by an unidentified strategic suitor which was considering making an offer for the company, however, the bid eventually failed to materialize.

 

This is a mammoth $61bn deal, giving Broadcom a push into the software industry. The FTC, the UK’s CMA and China’s SAMR have all launched their probes into the merger. The regulators’ concerns appear to revolve around reduced competition for particular hardware components used with VMW’s visualization software. However, the transaction has been recently approved by the European Commission. AVGO and VMW have agreed to extend the termination date from May’23 to Aug’23, with a possibility of another extension to Nov’23. The companies expect the merger to close by Oct’23.

 

Seagen (SGEN)

Pfizer is acquiring large cancer treatment-focused commercial-stage biopharma Seagen. This is the largest M&A transaction announced so far this year. The current spread seems to exist due to the potential pushback from antitrust regulators and likely prolonged closing timeline. The transaction would give Pfizer a leading position in cancer treatment space where the company already owns a sizable portfolio of drugs. This might increase the combined company’s power to negotiate with insurers. In June, both companies pulled and refiled the merger notification with the FTC. The merger is expected to close in late 2023-early 2024.

 

Horizon Therapeutics (HZNP)

Biotechnology giant Amgen is acquiring a rare disease-focused biopharma Horizon Therapeutics. The target’s shareholders have already approved the transaction. The spread has widened from low-to-mid single digit levels to over 10% since May as the FTC filed a lawsuit to block the merger and was later joined by several US states. The opposition has argued that the transaction would allow AMGN to use rebates on its existing blockbuster drugs to pressure insurance companies and pharmacy benefit managers into favoring HZNP’s two key products, thus protecting their monopolistic positions. A positive here is that the there is no horizontal overlap between AMGN and HZNP’s marketed products, so it is still possible that the judge will approve the merger. The trial is set for September 11, with a ruling expected within a month after. Worth noting that during the company sale process, HZNP has attracted interest from several other large industry players, with Sanofi putting forth a number of acquisition offers, including the final bid coming at $110.50/share. This suggests that the downside might be partially protected in case of a deal break.

 

Amedisys (AMED)

Home health care provider Amedisys has scrapped the all-stock merger with infusion services provider Option Care Health and has instead agreed to combine with healthcare insurance giant UnitedHealth. AMED shareholders are likely to support the deal as it values the target reasonably vs peers and its historical valuation range. The spread might be explained by regulatory risks as AMED is one of the largest home healthcare providers in the US while UNH has recently acquired another large industry player LHC Group. Having said that, the home healthcare market is highly fragmented and with the acquisitions of AMED and LHCG UNH would still hold a less than 10% market share. Moreover, the fact that AMED has agreed to combine with UNH despite a relatively small premium to OPCH’s offer might indicate that the target’s management sees a clear path to regulatory approval.

 

PNM Resources (PNM)

Spanish electric utility giant Iberdrola is acquiring New Mexico-focused electricity provider PNM Resources. The transaction has received all the needed approvals other than the New Mexico Public Regulation Commission’s (NMPRC) consent. In Dec’21, NMPRC rejected the transaction due to Avangrid’s history of providing low-quality services in the US, legal investigation in Spain and the risk of increases in electricity prices. PNM-AGR have appealed the commission’s decision to the Supreme Court, claiming that the main sticking points, related to the legal investigation and alleged low-quality services provided by AGR in the US, have been either resolved or unsubstantiated. Interestingly, in early 2023 the entire NMPRC was replaced with new members appointed by the governor who has previously openly supported the transaction. The merger sides have since asked for the merger to be reconsidered by NMPRC instead of the Supreme Court, however, the Supreme Court has recently denied the request for remand.

 

NeoGames (NGMS)

Australian gaming giant Aristocrat Leisure is acquiring an online lottery/gaming software provider NeoGames. The transaction is strategic for the acquirer giving it a push into the still nascent US real money gaming (RMG) industry. Shareholder approval is nearly guaranteed as 61% of NGMS equity holders are already in support (the approval threshold is 67%). The existing spread seems to be explained by the relatively long closing timeline and uncertainty surrounding antitrust and foreign investment approvals. The online gaming and sports betting markets are strictly regulated in the US and EU, implying that the transaction might face additional timeline delays. NGMS is the leading player in the online lottery space in the US with a c. 67% market share. Given that Aristocrat is among the largest gambling machine and related gaming content producers/operators worldwide, the transaction might potentially run into antitrust issues. However, a positive here is that the horizontal overlap between the companies is limited.

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