M&A transactions and shareholders: Bristol-Myers case

Shareholders’ voting rights cannot be forgotten in M&A transactions. They are a key element for the achievement of the deals where quoted companies are involved. With this post, we want to highlight a current mismatch in price related to the uncertainty of the will and vote of shareholders involved in a recently announced M&A transaction.

Bristol-Myers Squibb (BMY) began this January 2019 announcing a massive $74 billion acquisition of Celgene (CELG). This makes it the third largest M&A transaction in pharma’s history after 1999 Pfizer/Warner-Lambert and 2000 Glaxo Wellcome/SmithKline Beecham.

If the cash-and-stock transaction closes, Celgene shareholders will receive one BMY share and $50 in cash for each Celgene share. Celgene shareholders will also be remunerated with one tradeable Contingent Value Right ("CVR") for each share of Celgene, which will entitle its holder to receive a one-time potential payment of $9 in cash upon FDA approval of all three of ozanimod (by December 31, 2020), liso-cel (JCAR017) (by December 31, 2020) and bb2121 (by March 31, 2021), in each case for a specified indication.

Based on the closing price on January 25, 2019, of $48,93 BMY per share, the cash and stock consideration to be received by Celgene shareholders at closing is valued at $98,93 per Celgene share and one CVR. Nevertheless, Celgene shares closed at this same day at $87.62. This represents an 11,4% disparity in price and it is mainly caused by the risk of deal-refusal by the shareholders of both or one of the companies.

Though the executives and board of directors of both companies have promoted and supported the transaction, the market is discounting the risk of shareholders’ opposition to go forward. Especially from the BMY side, as they are the ones paying the biggest part of the party.

A significant portion of the $74 billion acquisition value will be funded through a Bristol-Myers Squibb dilutive issuance of new shares to Celgene’s shareholders and the rest will be funded by new debt. When completed, Bristol-Myers Squibb shareholders are expected to own about 69% of the company, and Celgene shareholders are expected to own roughly 31%.

On top, BMY has already confirmed that is taking out a $33.5 billion bridge loan to help finance its purchase of Celgene. This loan, which will be underwritten by Morgan Stanley Senior Funding, Inc. and MUFG Bank Ltd., will rank as the seventh largest bridge facility on record according to Bloomberg.

Once completing the acquisition, Bristol-Myers Squibb will also have to include Celgene’s net debt (which stood at $18 billion at the end of the third quarter) on their new combined balance sheet. After combining this with Bristol-Myers Squibb’s current net cash position and the approximately $35 billion cash acquisition outlay, it leaves the new combined company’s net debt approximately at $48b according to company statements. This makes that net leverage after the deal will be 2.8 times debt to EBITDA and Moody’s and S&P put the company’s ratings on review for downgrade after the announcement.

The purpose behind this transaction is to create an innovative biopharma leader, to enhance leadership positions across the new combined portfolio and to benefit from operational and commercial synergies, according to BMY CEO. Nevertheless, the price divergence shows that investors remain cautious about the outcome of the voting process in each company general meeting.

In the end, shareholders will decide and fears will be either corroborated or vanished.