Quick Pitch: Asensus Surgical (ASXC)

Merger Arbitrage – 40% Upside

 

I suppose you could call this idea ‘undercovered’ as the only place I’ve seen it mentioned is this very brief note on Clark Street Value a month ago. It piqued my interest initially, but I decided to shelve it as it seemed just a bit too speculative. However, the merger arb spread has now widened from 30% to 40%-45%, while the remaining timeline is substantially shorter. I have digged deeper into the setup, and, despite the market’s skepticism, I’d say the deal has a high likelihood of closing on the current terms. But keep in mind that ASXC is probably a zero if this merger fails. So do your own due diligence and size positions accordingly.

In early April, Asensus Surgical has signed a non-binding agreement to be acquired by German medical device manufacturer Karl Storz. Consideration is “best and final”, at $0.35/share in cash. The spread initially stood at 20% and gradually widened to the current 40%-45%. Both companies have entered into 10-week exclusivity period to allow for due diligence and negotiation of a definitive agreement. With 5 weeks already passed, the exclusivity period is set to expire on June 12. I’d expect to expect an announcement of a definitive agreement to be out by that time.

ASXC develops robotic surgery systems. The company already has one commercialized product, Senhance, and is currently developing a much more advanced surgical robot, Luna. ASXC also offers image analytics software that enhances the performance of its robotic system.

Optically, the downside to pre-announcement levels is small, at 16%. However, a large wrinkle in this setup is that ASXC is about to run out of cash. As of December 2023, the company had $21m in gross cash, which was projected to last until early June. To address this, Karl Storz has agreed to provide a bridge loan of up to $20m. The loan will be disbursed in installments: $1m weekly until the exclusivity period ends, followed by $10m upon signing the definitive agreement ($5m at signing and $5m a month later). The bridge loan terms look pretty standard. The rate is set at SOFR + 10%, which sums up to around 15% in total at the moment. However, if no agreement is reached, ASXC will need to repay the loan in 30 days, likely resulting in a massive equity raise or, more probably, bankruptcy. The currently commercialized Senhance robotic system hasn’t been a success, struggling with sales and far from profitability. Luna isn’t expected to launch until early 2026. If Karl Storz backs out, raising fresh capital under such circumstances would likely be very challenging.

So the key reason for the spread is market’s fear that without the buyout, ASXC could go bankrupt, and that Karl Storz might have deliberately added the bridge loan into the agreement in order to take advantage of the situation. In other words, there’s a risk that Karl Storz could back out of the deal, demand debt repayment, push ASXC into Chapter 11, and then take control of the entire company as its sole debt-holder.

However, I think this risk is minimal. All indications suggest that the buyer is actually acting in good faith and I do not think something unexpected will be discovered during the due diligence.

Karl Storz is a highly reputable strategic buyer and a global leader in endoscopy device market (see here and here). By last year, its endoscopy system has been installed in 10,000 operating rooms, giving it a market share of 20% in the U.S. and EU. Run by a founding family for 3 generations, the company has 9,400 employees and generated €2.2bn in sales last year. The buyer also has a track record of other recent strategic acquisitions, including AventaMed DAC (2023) and Innersight Labs (2024).

The actual buyer of ASXC would be Karl Stroz’s VentureOne – the newly established venture arm focused on robotics, AI and the development of an ecosystem for robotic surgery. ASXC fits this niche perfectly and, crucially, will be VentureOne’s inaugural acquisition. In my opinion, this significantly limits the likelihood that Karl Storz is scheming with intentions to gain control of ASCX cheaply in the bankruptcy. Reputational risk for the company and particularly its VentureOne arm would be too large.

Karl Storz has already been in partnership negotiations with ASXC for over a year and should be well-acquainted with the company’s R&D, IP and existing products. In February 2023, Karl Storz and ASXC announced a preliminary collaboration agreement that encompassed several aspects:

  • Karl Storz would market and sell ASXC’s software as a standalone product through its extensive network of relationships with hospitals and surgeons;
  • Both companies would also collaborate to integrate this software into Karl Stroz’s vision systems;
  • Furthermore, the parties would work on developing next-gen instrumentation for ASXC’s upcoming robotic system, Luna.

This was announced like a pretty big deal at the time and was PR’ed by both ASXC and Karl Storz. The parties even arranged an investor/analyst day just to present this collaboration to investors (see the transcript here).

The willingness of Karl Storz to market, integrate, and develop parts for ASXC’s products already implies a pretty strong confidence. From there on, both parties have had more than 1 year of additional negotiations during which the buyer clearly wasn’t sitting idle and I’m sure some additional DD was being done.

It’s no surprise that the talks took so long, as the original partnership negotiations have probably shifted towards full buyout talks some time ago. The takeover offer was announced as “best and final”, suggesting this wasn’t Karl Storz’s first bid. The buyer likely made a few lower bids privately before both parties agreed to publicly announce the current one.

While such a turn in negotiations (i.e. from collaboration to full buyout) is a bit unusual, it is likely explained by the dire liquidity situation of ASXC. In order to start selling ASXC’s products/software to own clients, Karl Strolz first needed to ensure continuity. With ASXC having insufficient liquidity to last more than a year and a couple more years expected on the development of Luna system, the initially planned collaboration agreement was doomed to fail without concurrent financing arrangements. The full buyout solves this problem. The extended timeline of negotiations can probably also be attributed to Karl Storz’s naturally longer bureaucratic processes (large company, many decision makers and decisions taken only in monthly meetings, etc.), especially given that this is the first acquisition for its new venture arm.

All in all, I’m fairly comfortable that the buyer is acting in good faith and is unlikely to screw ASXC shareholders by pushing the company into bankruptcy. Equally, I do not think anything unexpected will be discovered during the ongoing due diligence that would cause withdraw the takeover proposal. Karl Storz has likely already accumulated considerable insight into ASXC’s technology and the prospects for its solutions during the one-year-long engagement process. After all this, Karl Storz still decided to acquire ASXC at a significant premium and to lend money to the company (knowing that ASXC will have no means of repaying this debt). To me, this seems like a sign that most of due diligence has already been done and the final steps are more procedural in nature (might be just wishful thinking on my side).

16 Comments

16 thoughts on “Quick Pitch: Asensus Surgical (ASXC)”

    • Not sure what “cc” stands for but I read the call transcript and, maybe it’s confirmation bias, but it seemed like ASXC were keen for the deal to go through and they had already utilized 7m of the available financing from Storz. If this thing hasn’t fallen over between Feb-23 and now, then I can’t understand why they would provided debt financing to keep their acquisition target alive unless they were pretty damn certain they were going to go through with the deal. Then again you can fit my merger arb knowledge an experience inside a pea….

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      • my concern is this is a loan to own situation. company burning money like a dumpster fire

      • So it could be a zero, but the incentives all round don’t imply that. But because it could be a zero, and because I don’t have much merger arb experience I’ve sized it small enough that it won’t hurt me too much financially if it goes to zero (but the psychological damage will surely last).

      • From a fund perspective, which I’ve got a bit of background in, you would never use an aggressive tactic like that for an inaugural acquisition, unless it was the only one you needed to spend the fund because no one would voluntarily transact with you after that. That take is purely qualitative and hard to handicap, but I have a hard time seeing the acquirer take that direction given their background and incentives.

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    • Putting myself in mgmt shoes, I would expect they are hoping for some kind of CVR given there is some indication there will be growth if they could just survive long enough to see it. But, if it comes down to the wire they can fold and accept the $0.35. Doesn’t preclude them from being bull headed, but in the CFO’s own estimate of the $10M getting them only to Q3, I just don’t see there being enough time for a plan B if they scuttle the deal.

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      • Yes, makes me wonder if there will be a deal or not. After research I thought this one would happen but i guess we will see.

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    • Risk free rate is at 5% and this is a penny stock. There’s got to be some spread to compensate for the extra risk.

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      • well, the deal is 100% secured…. and it wont take 1 year to close, right ?

      • “The transaction is anticipated to close during the third quarter of 2024, subject to customary closing conditions, including receipt of approval from the Asensus stockholders.”

        35c buyout, 33c price now, = 6% spread, or roughly 1.5% risk-free rate + 4.5% for the risk.

  1. My thesis that Karl Storz has been acting in good faith as a potential buyer of ASXC has proven correct. Both parties have finally signed the definitive agreement, with the terms unchanged, at $0.35/share. The stock price has jumped by over 40% on the news. Outside date has been set at October 30, so I guess the deal is expected to close by the end of Q3 or the beginning of Q4 at the latest. 5% spread remains, explained by the remaining timeline and massive (potentially 100%) downside just in case something goes wrong (albeit that’s highly unlikely at this point). The idea has played out really well with 35% return in 1 month.

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