May 21, 2021

Breakingviews: Roivant double-SPAC deal wallows in own cleverness

by Breakingviews.

SPACs, biotechnology and deals where insiders buy out minority investors are all at the more complex end of company finance. Roivant Sciences has found a way to combine all three. It plans to raise funds by merging with a listed special-purpose acquisition company and then may buy out minority investors in Immunovant, a drugmaker it floated two years ago via a sale to another blank-check vehicle. At heart, what Roivant is doing is fairly simple – and risky for investors who join it for the ride.

Roivant has about 58% of Immunovant, which at $1.5 billion is worth two-thirds less than it was at the end of last year, thanks mostly to a hitch in trials of its lead drug for autoimmune disease. Now Roivant, run by biotech entrepreneur Vivek Ramaswamy, plans to buy back the stake it doesn’t own at a premium appropriate for similar life-sciences deals. That could cost $1 billion, assuming a mark-up of a little more than 50%. Roivant is raising money through its own go-public merger with another SPAC, Montes Archimedes Acquisition Corp.

The basic premise, seen from Roivant’s perspective, isn’t so different from any company going public. It uses the process to raise money on the promise of investing it profitably – in drugs, factories, TV shows or something else. In this case, though, one of those investments is a listed company that Roivant thinks is undervalued. The presence of two SPACs is unusual, but mostly just reflects the fact that these companies are currently ubiquitous in capital markets.

What is genuinely peculiar is that Roivant says it has nonpublic information about Immunovant. Investors in both Roivant and Immunovant will naturally assume that the secret intel is positive. That means Roivant may have to pay up for Immunovant’s minority shares. But it also means that Roivant itself may get a valuation glow, if investors believe both that it has snagged a good deal and that Ramaswamy is, in general, good at identifying drugs that work.

A big catch is that investors don’t actually know for sure whether Roivant’s information really is positive, or at least, positive enough to justify whatever premium it might offer. And if Ramaswamy manages to goose the market value of Roivant, he may be less worried about overpaying for Immunovant. Biotech is a speculative business at the best of times, In this case, Roivant’s new investors will really be relying on faith.

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BREAKINGVIEWS

Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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