ALIOY - Actelion

[writser]

Short writeup - I haven't done a lot of work on this. Curious to know if anybody else here has an opinion on it. JNJ (306b) is buying ALIOY (30b) for $280 per share or $70 per ADR. Current ADR price is $68 for a ~3% spread.

- Deal is through a tender offer with a 67% minimum acceptance threshold. Given that there has been a bit of a bidding war and shares are now trading at ~$68 up from ~$35 in November the price looks to be on the high side (above analyst estimates, also at first glance at 30x FCF) and is supported by both boards. I see no particular reasons for the tender offer failing.
- Deal also makes sense for JNJ, relatively small and they can use overseas cash for it, which would be taxed otherwise anyway (or so I would think).
- According to the press release deal is expected to close by the end of Q2 with the tender offer commencing next month.

The interesting part: JNJ will only take over the "core portfolio" of Actelion. Before the transaction, Actelion will spin off its research pipeline as a new company, called (very originally) R&D NewCo. NewCo will launch with ~$1b in cash according to the press release. Now, I'm no expert but if you are a 30b company and you spin off your R&D pipeline funded with 1b in cash then that should be worth something, right? Let's say at least 500m or ~$5 per share and probably more - these guys have a track record and are no biotech clowns.

So, depending on how you value the spinoff the spread is 5%-7% by my rough calculations. Looks quite juicy for a deal that is supposed to close in a few months. No tax inversion shenanigans, just a honest deal. Am i missing something? Swiss taxes? Antitrust issues? I couldn't find anything but what do I know ..

I bought a couple of shares.

[Haasje]

Cons
-IF it breaks downside could be large
-Looks like a high price which can't be good for close %

Pros
-Insiders insisted to keep the R&D core and adviced to hang on to the shares
-Insiders built up $30 bil Actelion from a spin-out
-Insiders will be doing what they do best: drug discovery and company building: https://www1.actelion.com/en/scientists/r-and-d-approach/index.page?
-JNJ has a tax angle value likely split between parties, can only be good for the smaller party
-Return ok without the R&D core, monstrous with it
-JNJ has the cash
-The deal is so JNJ continues to have a sizeable stake in the spin-off. I think this increases odds the spin-off is very undervalued.
-Equity in spin-off may be attractive for JNJ from tax perspective (not sure)
-Actelion shareholders likely to vote with founders
-Actelion keeps a partnership with JNJ going

[writser]

More reading: https://valueandopportunity.com/2017/01/27/actelion-ch0010532478-merger-arbitrage-meets-spin-off/ . Not much news - not too much information out there yet afaik.

[Haasje]

https://www.bloomberg.com/news/articles/2017-01-27/hedge-funds-track-j-j-private-jet-for-an-edge-on-actelion-score

[Phaceliacapital]

JNJ needs this deal. I doubt it would not go through...

[indirect]

I agree. Spread is attractive for few months and Stub for free.

[ccplz]

What do they have in the pipeline?

What is JNJ buying these guys for if not for their drug discovery ability?

[chrispy]

This is a pretty interesting deal.  One question for those that are more familiar with these; if there is a market correction but the deal continues forward and completes, would the $68ADR price stay relatively stable and only fluctuate based on the likelihood of this deal completing?

[JayGatsby]

Has anyone checked the fees on the ADR? I haven't done much similar with ADRs but the dividends I get from other companies can sometimes have hefty fees attached.

[Hielko]

ADR fees are as far as I know (almost?) always in the range of $0.02/$0.05 per share per year. Not an issue for a stock with this price. But if you buy a one dollar stock it can be huge.