March 1, 2019

Breakingviews: Bristol-Myers $74 bln deal needs surgery

by Breakingviews.

Bristol-Myers Squibb’s acquisition of Celgene needs surgery. Two of the U.S. pharmaceutical group’s shareholders – Wellington Management and activist Starboard Value – have come out against the $74 billion deal it struck with the biotech firm in January. The market isn’t pricing in the acquisition happening as Bristol-Myers envisaged. It doesn’t help that the buyer was already overpaying.

Wellington Management, which owns about 8 percent of Bristol-Myers, rarely publicly opposes deals. It says this one is too risky and that there were “alternate paths to create value.” Starboard, whose stake was totted up at below 1 percent by Bristol-Myers earlier this month, is more voluble, firing off a 16-page objection letter in which it expressed its preference for the buyer to improve its focus, or better yet, sell itself.

The dissidents are right on one thing: the price tag is too high. Bristol-Myers agreed to pay a premium of more than $25 billion for Celgene. The present value of $2.5 billion in projected cost cuts, once taxed and capitalized, is some 20 percent short of this, even ignoring the fact they will take two or more years to materialize. In short, all the obvious benefits of the deal appear to be captured by the seller rather than the buyer.

Bristol-Myers could go in two directions. It could forge ahead and hope to persuade over half of its investors that it can improve on Celgene’s management’s recent history of regulatory problems, missed projections and questionable deals. It can also point out even with the premium, it’s acquiring Celgene for 30 percent less than the company’s shares were trading at in 2017. Or maybe it can appeal to some investors’ desire for a quick payout – about 90 percent of the top 150 Celgene shareholders own a majority of Bristol-Myers stock, according to a person familiar with the situation.

Alternatively it could rethink – and if not walk away, which would trigger a $2.2 billion penalty fee – perhaps restructure the deal. Celgene shares were trading around $66 each before the buyer offered about $102 for them, by its own calculation. They currently trade at $84 each. If discontent among Bristol-Myers investors spreads, both sides might be persuaded a lower price beats no deal at all.


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