Credit markets have more than fully recovered since the March crunch and M&A activity has picked up noticeably.
Gilead (GILD, Financial) made a tender offer for Immunomedics (IMMU, Financial) on Sept. 15. Gilead offers a premium that exceeded the price on Sept. 14 by over 100%, offerring $88 per share. If Gilead closes the deal, it adds up to over $20 billion.
The deal is being made for Trodelvy, which is an antibody-drug conjugate that has been signed off on by the FDA to treat triple-negative breast cancer, a particularly hard type of cancer with few existing options.
When Gilead made its bid, it had been talking to Immunomedics about a deal for six months already. The parties apparently trusted each other because Gilead gained access to data that wasn't publicly available yet about Trodelvy. On Sept. 18, Immunomedics presented highly encouraging phase 1 data about its effectiveness versus brain tumors at the ESMO oncology conference.
All of this turns the deal into an interesting, and in my opinion attractive, M&A situation. Immunomedics trades just 3.07% below the deal price of $88. Meanwhile, by my calculations, it could drop back to $42 if the tender offer doesn't go through.
Superficially, there isn't a lot to like, but digging deeper I found it an increasingly compelling situation. The acquisition is executed on by a tender offer, and these tend to close relatively fast. They are often employed if the acquirer wants to get a deal done fast. In addition, there is a $700 million break-up fee which Immunomedics has to pay Gilead if it walks away from the deal.
This is an unusually large fee. A fee like that serves to deter other suitors from bidding. If they do, they have to pay not just a premium over Gilead's bid, they are also draining their acquisition of a lot of cash. Worse, that cash goes right to a competitor.
Boards of targets shouldn't negotiate too large a breakup fee because it is not great governance to deter other potential acquirers and hurt shareholder value.
Ultimately, I don't think there's going to be another bid. A 100% premium and a large breakup fee are strong deterrents. Immunomedics revealed the latest data about Trodelvy after the tender offer but there were three other interested parties that had seen that data. At least one third party was willing to go up to the high $60's in order to acquire Immunomedics.
The presence and interest of these other bidders, as well as the data revealed post-bid, give me confidence that the break price isn't all the way back to $42. The way the entire deal came together, with extensive due diligence over months by Gilead, also adds to my confidence that this transaction will close.
| Name acquirer | Name target | Target ticker | Acquirer ticker | gross spread | expected annualized return | Days remaining until close | estimated closing probability | Break price | Cash bid |
| Gilead Sciences, Inc. | Immunomedics, Inc. | IMMU | GILD | 3.07% | 15.40% | 74 | 99.00% | 70.00 | 88 |
Table: author's model
To assess the attractiveness of various M&A situations, I try to gauge the expected annualized return. That allows me to compare merger situations against each other. Here I believe the probability is far above average the deal will close. I think the break price is quite a bit above the undisturbed pre-deal price. However, it doesn't matter much, because I'm thinking there is a 99% chance of closing. Finally, I'm estimating an average of seventy days until the deal closes. That assumes there are no regulatory hiccups. I don't expect regulatory problems because Gilead isn't strong in the oncology therapeutic area. If my assumptions are correct, this deal still offers a 15% expected annualized return even with this tiny spread.
Disclosure: author is long common shares of Gilead Sciences and long common shares of Immunomedics as well as long Immunomedics puts.
P.S. my disclosure could be considered a bit strange, but earlier on with less information about this deal, I noticed puts at a $34 strike, expiring Nov. 20, at what looked like very attractive prices. I acquired them and unfortunately haven't been able to get rid of these for an acceptable price.
Read more here:
- Activist Target With Upcoming Tender Offer and a 6.72% Annualized Distribution
- A Unique Security at a 68% Discount to Fair Value
- Why I'm Betting on Ackman
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