Summary
- Bristol-Myers is expected to close on the Celgene merger around year-end.
- The deal is about 50% cash and stock with an additional tradable CVR requiring investors to decide how to handle the cash and CVR portions.
- The projected upside holding CELG shares is ~7.5%.
- BMY shares trade at about 6.5x a post-merger EPS target of $7, but the stock likely struggles due to debt load.
As the Celgene (CELG) acquisition heads towards closure, investors need to position themselves for owning shares in the new Bristol-Myers Squibb(BMY). The cash and stock transaction positions the long-term value of the merger in owning BMY stock, requiring investors to have a plan for timing a move out of some more short-term gains in CELG.
Image Source: Celgene website
Key Points
The deal has several key points. First, Celgene shareholders will get nearly 50% of the deal in cash. Second, Celgene shareholders get a tradable continent value right or CVR worth up to $9 based on the future approval of three drugs. Third, the deal provides substantial EPS upside for the new Bristol-Myers after the transaction closes due to the use of accretive debt and substantial synergies.
Bristol-Myers agreed to pay a listed transaction value of $102.43 per Celgene share and one CVR valued at up to $9. The total deal value was potentially $111.43, assuming the approval of three drugs for the CVR to pay.
The deal is broken out to 1.0 share of Bristol-Myers and $50.00 in cash for each Celgene share. At an updated Bristol-Myers price of $46.25, the current deal value on closing the merger is $96.25 plus the CVR.
Due to the decision for Celgene to divest Otezla to obtain FTC approval, the risk of the deal closing is minimal. The European Commission has already approved the merger. Therefore, the merger premium is a minimal $2.25 plus the CVR value with Celgene trading at $94.00. Assigning a $5 value to the CVR, Celgene has about 7.5% upside on a merger closing by year end.
The big question is where the CVR trades after the merger closes around the start of 2020. The continent right payoff requires the FDA approval of the following three drugs for specified indications under these timelines:
- ozanimod - December 31, 2020
- liso-cel - December 31, 2020
- bb2121 - March 31, 2021.
The valuing of this continent right is highly unknown due to the payout timeline and uncertainty of obtaining approval of all three drugs. Both ozanimod and lisco-cel have made positive steps towards FDA approval so the odds appear at least 50% at this point.
