Nastassia Samal
Introduction
F-star Therapeutics (NASDAQ:FSTX) is a clinical stage biotech company which initially showed a lot of promise when it was listed on the NASDAQ through a merger in 2020. Specializing in immunotherapy based cancer treatments, F-Star entered several different partnerships with other larger and more established players in the field such as Denali Pharmaceuticals (DNLI) and Merck (MRK). Unique to F-Star was their proprietary tetravalent bi-specific antibody platform which allowed their cancer treatments to target two antigens simultaneously, thus increasing the likelihood of an immune response to cancer.
And in late June this year, the final chapter of F-Star’s short journey as a publicly traded company was inked. InvoX – an international subsidiary of Sinopharm (OTCPK:SHTDY) – announced that they would be acquiring all of F-Star in an all cash tender offer deal.
Following the announcement, InvoX quickly submitted the 14-D9 filing and other SEC documents necessary to trigger the official tender offer to shareholders in early July. Their offer valued F-Star at ~$161 million, which translates into $7.12 per share. Prior to the announcement of the deal, shares of F-Star traded in the $3 range. And today, the stock trades at ~$6.20 at the time of writing. Purchasing shares before the official deadline to tender your shares and then calling your broker to tender your shares will lock in a quick profit – any share bought prior will return $7.12 in cash
Thesis
With the deadline to officially tender your shares due to close by the end of August 3rd, there exists a timely opportunity to profit between the current share price of the stock and the merger price. Those who buy the stock now will reap the rewards shortly after the results of the vote are announced.
This merger arbitrage opportunity does not come without risks, although I believe that the market is pricing in too much risk at this current valuation. Given the amount of time which has passed since the announcement of the deal without any regulatory intervention – coupled with the nature of the deal itself – I believe it has a very high chance of successfully closing.
At the moment, the stock trades at ~14% discount to the tender offer price; such a disparity arises from uncertainty, creating a profitable opportunity for those interested in betting that the deal will close. Uncertainty with these situations stem from three main risks: one or both of the parties call the deal off, there could be regulatory intervention, or a majority of F-star shareholders may simply choose to not tender their shares. All three situations are, in my view, highly unlikely to actually occur. At the moment, it appears that the market is highly exaggerating the possibility of the deal falling through. The palpable fear in the broader equity markets and the especially brutal bear market in the biotech sector has dampened risk appetites.
However, for those interested in betting against fear and on rationality, I believe this opportunity presents a favorable risk-reward profile. Those who have that stomach should seriously consider initiating a long position in F-star Therapeutics.
Why I Find It Unlikely That Either Parties Will Call It Off
Sometimes, these deals fall through because one or both parties decided to back out of the transaction. This can happen for many reasons. Maybe changing market circumstances made the deal no longer possible. Shareholder activism could jettison it. Or further due diligence may reveal information previously unknown, torpedoing the deal as a result.
None of these three situations are likely to occur before the tender deadline. For one, nothing has materially changed in the market and broader economy which would shuttle this deal. Yes, the economy is contracting, but the economy was already trending in a negative direction when the deal was being considered and by the time it was formally announced. InvoX and F-Star also begun evaluating and considering this deal since last year in November. As a part of that consideration, F-star shared their confidential data while in the midst of negotiating several different price points. For InvoX to go back on their word after settling on this final price point would require them to pay a reverse break-up fee, damaging their reputation in the process.
In the time which has passed since the deal was announced, no major shareholder opposition from either side has emerged to challenge the deal; no institution or grassroots campaign has formed to protest the terms. The tender offer had unanimous approval from both boards of directors. There exists no challenge from within and no external challenger.
Regulatory Intervention?
One seemingly serious worry is that regulatory intervention could kill the acquisition. This possibility, although appearing pronounced at first glance due to InvoX being a Chinese related entity, is actually quite unlikely in my view.
Both the relevant U.S and U.K regulatory authorities have been informed, and the Chinese regulatory authorities are unlikely to attempt to block the deal – considering how this would not be an asset being acquired from a Chinese corporate entity.
The Committee on Foreign Investment in The United States (CFIUS) is the body to watch for this deal. If any intervention were to come, it would likely come from the CFIUS. This body was greatly empowered under the Trump presidency; several foreign deals were blocked as a result. And that hawkish trend does not seem to be abating under the Biden presidency.
Make no mistake, InvoX being a Chinese related entity will likely draw more eyes to this transaction. But the nature of the transaction gives it a greater ability to withstand scrutiny. For one, this is not a big deal by any means. F-Star is only being acquired for ~$161 million. When you factor in the net cash they have on hand – a little over ~$59 million – then that would only yield an enterprise value of $102 million for the tender offer. Larger fish attract more attention than small winnows. And this would be a small winnow.
F-Star is also not in an industry that has national security relevance. F-Star does not store the sensitive private information of Americans, nor does it construct vital materials or products relevant to our national security interests, such as semiconductor chips. This is just a tiny unprofitable biotech company with an unproven approach to cancer immunotherapy. InvoX acquiring F-Star would not threaten American security interests or give them any dominant market power. For the CFIUS to object to the tender offer, they would have to substantiate their concern with valid reasons. So far, no objections have been raised.
Will They Tender?
The last situation that would kill the transaction is the least likely in my view. For everything to close, the final internal hurdle to clear is the collective shareholder vote on the tender offer itself: shareholders have the opportunity to vote in favor of the deal by tendering their shares by the August 3rd deadline.
If a majority of the shareholders, over 50%, tender their shares, then it will close. If that bar is not surpassed, then the tender offer will be rejected.
I believe that the vast majority of the shareholders will decide to tender their shares, as it is the rational option; it would maximize shareholder value in an uncertain macroeconomic environment. With only ~$69 million in cash and cash equivalents on hand and multiple clinical trials to fund, existing shareholders could face massive dilution if F-Star were to go it alone. And with no stream of revenue and public equity prices falling over the past year, it would simply be impractical for the company to continue having to raise funds from secondary markets.
The most prudent option would be to sell the company and return the cash to stockholders. Locking in a concrete outcome would be a great win for the company.
It is imperative that current shareholders who have not yet tendered their shares and are reading this article contact their broker as soon as possible to tender their shares. For those reading this article who do not want to tender their shares, I would urge them to reconsider. The entirety of F-Star’s upper management and board of directors believes that this is the right move. Would you want the tender offer to fail and then have them lead a company that they wanted to sell?
Risks
If the deal were to not go through, it would send the stock crashing down. It is likely that the stock will trade in the $3 range again, losing all of its gains. For anyone who bought the stock hoping the deal would close, they could end up with a ~50% loss on their investment.
F-Star itself is not a good investment for your typical equity holder. Their cash pile is slowly shrinking, and their platform is largely unproven. According to the tender offer filing, many other larger companies passed on acquiring F-Star when given the option to do so. InvoX was the only company which ultimately made an offer. So everything hinges on this deal going through.
Your greatest risk of the tender offer not going through is going to come from the CFIUS; gauging the decision-making of any regulatory body is inherently difficult. However low the risk may be that they block the deal, there is always a chance that they could; there is nothing F-Star or InvoX could do within reason to stop regulators from throwing a wrench in their plans.
Conclusion
The nature of the acquisition itself, coupled with the time passed so far without any bad news, assuages my anxieties about the transaction falling through.
But for Mr. Market himself, I can see why they may be skeptical of the deal closing. My personal read of the terrain leads me to believe that rationality will prevail – the discounted value that the stock currently trades at is far too excessive given the risks. Those who can digest the risk should certainly consider initiating a long position in F-star Therapeutics.
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