ACTELION LTD ALIOY
February 08, 2017 - 12:09am EST by
ladera838
2017 2018
Price: 65.84 EPS 0 0
Shares Out. (in M): 440 P/E 0 0
Market Cap (in $M): 28,943 P/FCF 0 0
Net Debt (in $M): 418 EBIT 0 0
TEV ($): 28,525 TEV/EBIT 0 0

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  • Merger Arbitrage
 

Description

On January 26, 2017, Johnson & Johnson (JNJ) announced a definitive agreement to acquire Actelion Ltd. via a cash tender offer for US$280 per share, payable in US dollars. 

My investment thesis is that investors are being offered an attractive rate of return on an arbitrage transaction that has very limited risk.

Actelion Ltd. Is a Swiss company, and its shares trade primarily on the SIX Swiss Exchange in Zurich (SIX: ATLN), with the price denominated in Swiss francs. However, the transaction is priced is US dollars. For simplicity, all of my discussion will be based on the Actelion ADRs (ALIOY), each of which represents one-fourth of an Actelion share.

 

DEAL BACKGROUND

11/25/16 – JNJ and Actelion confirmed that they were in preliminary discussions.

12/13/16 – JNJ announced that it had ended discussions.

12/15/16 – Bloomberg reported that Sanofi was in “advanced talks” to acquire Actelion at a price of about $275 per share, with the possibility of a Contingent Value Right (CVR).

12/21/16 – Exclusive discussions between Actelion and JNJ.

1/26/17 – Definitive agreement between JNJ and Actelion.

 

The $30 billion transaction is expected to be immediately accretive to JNJ and will be funded with part of the $42 billion cash held by JNJ outside the US.

As part of the transaction, immediately prior to the completion of the acquisition, Actelion will spin out its drug discovery operations and early-stage clinical development assets into a newly created Swiss biopharmaceutical company ("R&D NewCo"). The shares of R&D NewCo will be listed on the SIX Swiss Exchange and will be distributed to Actelion's shareholders as a stock dividend upon closing of the tender.  JNJ will initially own 16% of R&D NewCo and have rights to an additional 16% of R&D NewCo through a convertible note.  R&D NewCo will launch with cash of approximately US$ 1 billion; additional details to follow via a prospectus to be filed by mid-February.

JNJ expects to commence the tender offer in mid-February and close the transaction by the end of the second quarter of 2017.

 

ANALYSIS

Actelion

 

Acquisition price per share

 $280.00

 

 

ADRs per Share

4

 

 

Per  Actelion ADR

 

Acquisition price

 $70.00

 

 

Current price

 $65.84

 

 

Actual return

6.3%

Annualized return

16.2%

(assuming 6/30/17 close)

 

 

 

 

 

 

 

R&D NewCo

 

Planned cash balance

 $1,000,000,000

 

 

Assume Actelion shareholders

  retain 68%

 $680,000,000

 

 

Per Actelion share

 $6.35

 

 

Per Actelion ADR

 $1.59

 

Current purchasers of Actelion would earn a 16.2% annualized rate of return, in what appears to be a relatively certain transaction, along with the potential value associated with a stub stock that had R&D upside and a potential cash balance of per Actelion ADR of $1.59 (2.4% of the purchase price of Actelion ADRs).

The value of R&D NewCo will be hard to determine until the tender offer document is filed, but is likely to be north of zero, thus providing positive optionality. There is value both in the cash and in the R&D in progress, and it is unclear how investors will weigh the value of each of each.

My crude assumption is that the R&D NewCo will trade at between 50% and 150% of the cash balance, or roughly $0.79 to $2.38 per Actelion ADR. This increases the nominal 6.3% return to a range of 7.5% to 9.9%, and the total annualized return to between 19.3% and 25.5%.

Why so cheap? It is unusual to see returns this high if an acquisition is considered to be safe. For the first three days after the deal was announced, the ADRs traded at over $68, or less than 3% below the acquisition price. My theory is that many longtime investors are selling to lock in their large gains. Actelion’s stock price was roughly half the current price just before the U.S. elections. One year ago, the ADRs were at $31. The large size of the deal may also exceed the arbitrage capacity for one deal, which would otherwise narrow the spread.

 

COMPANY BACKGROUND

Actelion Ltd. is a leading biopharmaceutical company focused on the discovery, development and commercialization of innovative drugs for diseases with significant unmet medical needs.

Actelion is a leader in the field of pulmonary arterial hypertension (PAH). The company’s portfolio of PAH treatments covers the spectrum of disease, from WHO Functional Class (FC) II through to FC IV, with oral, inhaled and intravenous medications. Although not available in all countries, Actelion also has treatments approved by health authorities for a number of specialist diseases including Type 1 Gaucher disease, Niemann-Pick type C disease, Digital Ulcers in patients suffering from systemic sclerosis, and mycosis fungoides type cutaneous T-cell lymphoma.

 

RISKS

 

There is always the risk that the deal does not go through, which seems unlikely in this case. There is no financing risk. Additionally, unlike the Pfizer-Allergan deal, this is not a tax inversion transaction. Also, Sanofi had expressed interest in acquiring Actelion, and was reportedly close to an agreement at one point.

 

Another risk is a delay in closing, which would reduce the annualized returns.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Intermediate - release of the tender documents in mid-February should narrow the spread

Final - closing of the deal by the end of the second quarter of 2017

    sort by    

    Description

    On January 26, 2017, Johnson & Johnson (JNJ) announced a definitive agreement to acquire Actelion Ltd. via a cash tender offer for US$280 per share, payable in US dollars. 

    My investment thesis is that investors are being offered an attractive rate of return on an arbitrage transaction that has very limited risk.

    Actelion Ltd. Is a Swiss company, and its shares trade primarily on the SIX Swiss Exchange in Zurich (SIX: ATLN), with the price denominated in Swiss francs. However, the transaction is priced is US dollars. For simplicity, all of my discussion will be based on the Actelion ADRs (ALIOY), each of which represents one-fourth of an Actelion share.

     

    DEAL BACKGROUND

    11/25/16 – JNJ and Actelion confirmed that they were in preliminary discussions.

    12/13/16 – JNJ announced that it had ended discussions.

    12/15/16 – Bloomberg reported that Sanofi was in “advanced talks” to acquire Actelion at a price of about $275 per share, with the possibility of a Contingent Value Right (CVR).

    12/21/16 – Exclusive discussions between Actelion and JNJ.

    1/26/17 – Definitive agreement between JNJ and Actelion.

     

    The $30 billion transaction is expected to be immediately accretive to JNJ and will be funded with part of the $42 billion cash held by JNJ outside the US.

    As part of the transaction, immediately prior to the completion of the acquisition, Actelion will spin out its drug discovery operations and early-stage clinical development assets into a newly created Swiss biopharmaceutical company ("R&D NewCo"). The shares of R&D NewCo will be listed on the SIX Swiss Exchange and will be distributed to Actelion's shareholders as a stock dividend upon closing of the tender.  JNJ will initially own 16% of R&D NewCo and have rights to an additional 16% of R&D NewCo through a convertible note.  R&D NewCo will launch with cash of approximately US$ 1 billion; additional details to follow via a prospectus to be filed by mid-February.

    JNJ expects to commence the tender offer in mid-February and close the transaction by the end of the second quarter of 2017.

     

    ANALYSIS

    Actelion

     

    Acquisition price per share

     $280.00

     

     

    ADRs per Share

    4

     

     

    Per  Actelion ADR

     

    Acquisition price

     $70.00

     

     

    Current price

     $65.84

     

     

    Actual return

    6.3%

    Annualized return

    16.2%

    (assuming 6/30/17 close)

     

     

     

     

     

     

     

    R&D NewCo

     

    Planned cash balance

     $1,000,000,000

     

     

    Assume Actelion shareholders

      retain 68%

     $680,000,000

     

     

    Per Actelion share

     $6.35

     

     

    Per Actelion ADR

     $1.59

     

    Current purchasers of Actelion would earn a 16.2% annualized rate of return, in what appears to be a relatively certain transaction, along with the potential value associated with a stub stock that had R&D upside and a potential cash balance of per Actelion ADR of $1.59 (2.4% of the purchase price of Actelion ADRs).

    The value of R&D NewCo will be hard to determine until the tender offer document is filed, but is likely to be north of zero, thus providing positive optionality. There is value both in the cash and in the R&D in progress, and it is unclear how investors will weigh the value of each of each.

    My crude assumption is that the R&D NewCo will trade at between 50% and 150% of the cash balance, or roughly $0.79 to $2.38 per Actelion ADR. This increases the nominal 6.3% return to a range of 7.5% to 9.9%, and the total annualized return to between 19.3% and 25.5%.

    Why so cheap? It is unusual to see returns this high if an acquisition is considered to be safe. For the first three days after the deal was announced, the ADRs traded at over $68, or less than 3% below the acquisition price. My theory is that many longtime investors are selling to lock in their large gains. Actelion’s stock price was roughly half the current price just before the U.S. elections. One year ago, the ADRs were at $31. The large size of the deal may also exceed the arbitrage capacity for one deal, which would otherwise narrow the spread.

     

    COMPANY BACKGROUND

    Actelion Ltd. is a leading biopharmaceutical company focused on the discovery, development and commercialization of innovative drugs for diseases with significant unmet medical needs.

    Actelion is a leader in the field of pulmonary arterial hypertension (PAH). The company’s portfolio of PAH treatments covers the spectrum of disease, from WHO Functional Class (FC) II through to FC IV, with oral, inhaled and intravenous medications. Although not available in all countries, Actelion also has treatments approved by health authorities for a number of specialist diseases including Type 1 Gaucher disease, Niemann-Pick type C disease, Digital Ulcers in patients suffering from systemic sclerosis, and mycosis fungoides type cutaneous T-cell lymphoma.

     

    RISKS

     

    There is always the risk that the deal does not go through, which seems unlikely in this case. There is no financing risk. Additionally, unlike the Pfizer-Allergan deal, this is not a tax inversion transaction. Also, Sanofi had expressed interest in acquiring Actelion, and was reportedly close to an agreement at one point.

     

    Another risk is a delay in closing, which would reduce the annualized returns.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    Intermediate - release of the tender documents in mid-February should narrow the spread

    Final - closing of the deal by the end of the second quarter of 2017

    Messages


    Subjectuptravi
    Entry02/08/2017 09:24 AM
    Memberrhubarb

    it seems the post-deal pullback was related to a safety warning issued on Uptravi after patient deaths (rather than technical pressure as you insinuated).  can you comment on this?


    SubjectReason why it went down last week...
    Entry02/08/2017 09:28 AM
    Membermajic06

    I own this and currently it's my largest position but there is a reason why it went down last week besides the usual dynamics of why the spread was wide in the first place.  

    The spread effectively doubled because France issued a "Dear Doctor" letter for Uptravi. It was issued on Tuesday (before the deal was announced) but didn't circulate in the market till the following week.

    http://ansm.sante.fr/S-informer/Actualite/L-ANSM-prend-des-mesures-de-precaution-concernant-la-specialite-Uptravi-selexipag-traitement-par-voie-orale-de-l-hypertension-arterielle-pulmonaire-Point-d-information

    Thus, the risk would be that the FDA not only follows through but halts sale of the drug.  After doing work on all of this, I put the odds at effectively 0.  However, if this were to happen, the stock would fall 75-80%, it made some arbs nervous.

    The key to this trade is that JNJ can buy stock in the open market once they file the tender offer.  The tender offer will be filed Feb 16.  I believe the spread will narrow rapidly after that happens.


    SubjectADR
    Entry02/08/2017 09:30 AM
    Memberrhubarb

    also, if you own the ADR are there any issues?  Most importantly, do you get the spinco in ADR form?


    SubjectRe: MAE
    Entry02/08/2017 09:37 AM
    Membermajic06

    From a note this morning on the EMA meeting that just took place; re Post 4:

    "We reviewed the 2015 meeting highlights (last full year for which published information is available), and PRAC appears to have discussed and evaluated in excess of 2,000 “signals”. It would appear that following the PRAC’s evaluation that one of the drugs under evaluation was withdrawn approximately a year after the PRAC first evaluated the drug."

    I could go into detail about Uptravi but this drug was tested in over 1000 people in a very robust double blind study and there was a 40% reduction in mortality/morbidity.  P <.0001  

    The patients who died in France are all from the same clinic and 4 of the 5 were stage 4 (very very sick).  This is a terrible disease that sadly has many people die, regularly.  


    SubjectRe: Re: Reason why it went down last week...
    Entry02/08/2017 09:43 AM
    Membermajic06

    Sorry, I left out a huge part.  JNJ knew about this "Dear Doctor" letter before they signed the deal.  It was issued on Tuesday and deal signed on Thursday.  A spokesman confirmed to Bloomberg (and others) that they knew about this and chose to go forward w/ the deal anyway.  

    In order for the MAC to be triggered, it has to follow Switzerland law which means a 10% reduction in revenues would have to occur.  In my research I have come to believe this means total company revenue would have to decline 10%, not just 1 drug.  Uptravi is 10% or so of company revenues.  So the drug would have to be halted for sale - and pulled from the market - worldwide.  But even if that were to happen, net sales of the other 2 drugs Actellion sells are growing nicely.  That should offset the Uptravi revenue loss enough to keep a Swiss panel from declaring a MAC.  All that said, I see virtually no risk in Uptravi being pulled from the market in any country let alone worldwide.  

    This investigation will take months.  The JNJ tender will close end of March or end of April if extended.  The MAC has to happen before close of tender (not close of merger).  It's all in the filing JNJ pre-circulation they filed last week available on SEC.gov.  This also explains how they can buy stock in open market once the tender is filed.  

    To me, the real (and only) risk is if they somehow don't launch the tender next week.  This seems crazy given nothing has transpired since the French Dear Doctor letter that they knew about when they signed the deal.


    Subject7.5% gross spread; 2-3 months till closing max
    Entry02/17/2017 09:51 AM
    Membermajic06

    Offer has been filed.  JNJ has been pursuing for a full year.  Sanofi bid same amount in final days of negotiations.  Of course, if Uptravi is pulled from market everything would change.

    Tender closes end of March.  Shareholder meeting early April.  

    Some think JNJ won't buy any stock in open market unless the spread gets egregious given the SpinCo consideration complicates things.  

    I get the 7.5% gross spread valuing SpinCo at cash w/ no EV.  I believe it will be valued slightly higher.

    I think this is the best announced deal spread I've seen in years.  So it's bound to break.  Very overweight & it's my largest position.

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