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Merger Arbitrage
I love weird little speculative investments… as long as I don’t have to pay anything for them. From time to time, merger arb offers such opportunities. Pfizer (NYSE:PFE) offers one today.
Who?
Biohaven (NYSE:BHVN) is a biotech company targeting neurological and neuropsychiatric diseases, and rare disorders.
What?
Pfizer is in the process of buying it for $148.50 per share in cash. The deal requires approvals from the US, Austria, Germany, and the target’s shareholders. The two companies do not compete directly in either current or pipeline products. The progressive activists running US antitrust agencies could issue a second request to harass Pfizer, but there is zero point zero legitimate reason to do so. Just looking at the cash consideration, BHVN holders get a 5% IRR.
|
Target |
Ticker |
Parity |
Spread |
IRR |
|
Biohaven |
(BHVN) |
$148.50 |
$4.78 |
5% |
But wait, there’s more! We also get a spin-off of BHVN’s non-CGRP development state pipeline compounds. This is not easy to value but it’s worth… something. Even in a weak market for biotech, it will probably trade for at least $3-4 per share and could be worth a lot more in the future.
When?
The deal will probably close by March 2023. The spin-off process slows the process a bit.
Where?
Biohaven is in New Haven, CT.
Why?
Little spin-offs often get discarded by the market. There isn’t much overlap between merger arb funds and funds that would want this thing long term. So it could trade awfully. And the market for biotech is terrible. And it is so early stage that their bets might not pan out. And Pfizer didn’t want it. So much to not like here. But what I like I love: the fact that I’m not paying anything for it.
Conclusion
As long as you’re paying an adequate discount to the cash consideration, merger arbitrage spreads can offer an opportunity to load up on weird little securities that might be worth something someday.
Caveat
Hideous downside (to well beneath $75 per share) if this one breaks, but neither regulatory reviews nor financing present much substantive risks.
TL; DR
Buy BHVN.
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