BMY:CELG post S-4 filing – February 2019

S-4 for the BMY/CELG deal out today.  Not only is this about as fast as one could expect (slightly less than a month post announcement of the deal – which bodes well for an accelerated process on closing this deal), there were a number of great “nuggets” in the S-4.  To wit:

–       BMY and CELG engaged in discussions about an MOE back in early/mid 2017.  They signed an MOU and after spending a few months of exploratory discussions, they decided to “end further discussions” in June 2017 (presumably because they couldn’t agree on mutually agreeable terms).

–      Come June 2018, BMY started focusing again more intently on potential strategic combinations.

–      In September 2018, BMY decided to re-engage with Celgene and a flurry of discussions ensued for the next three months that resulted in the mutually agreed to transaction between the two parties

–      Of note, there was not a broad auction for Celgene.  Celgene’s banker (JPM), at the direction of Celgene’s board, only went out to one other pharmaceutical company that Celgene’s board and bankers viewed as the only other highly suitable fit.  JPM contacted the CEO on December 17 and on December 18 that CEO contacted JPM and said the Company was not interested.

The facts that:

–      There was only one other party contacted

–      That this outreach was happening in the depths of December when the markets were effectively melting down (and Celgene’s price specifically was melting down – most conservative CEOs don’t like catching falling knives)

–      That this was also happening at a time of year when presumably many management teams were effectively “checked out” for the end of the year

… makes one wonder if it’s not possible that there are others that could come out of the woodwork on Celgene.  I believe that this deal is pretty much “fully baked” and the spread continues to ratchet in on this deal.  But whereas initially the market was trading the deal like there was a fairly reasonable risk of an interloper coming in and making a bid for BMY (something that looks increasingly unlikely for all of the reasons I’ve mentioned in prior updates), now it looks like the only real outside chance of an interloper here is an interloper that could make a play for Celgene. I put that probability as low (sub 20%), but if it were to happen that would only benefit both Celgene shareholders (and in the short-term BMY shareholders as the short-term negative impact of the deal on BMY shares should be reversed).

In sum, looks like this deal is moving along in an expeditious manner.  S-4 is filed. Celgene just announced strong results which makes it harder for any naysaying BMY shareholders to take shots at the deal.  I’m calculating the IRR now between 20% (assuming CELG purchase at $90, BMY price at deal close of $49.5 and a Sept 30 closing date) and 42% (assuming CELG purchase at $90, BMY price at deal close of $55 and a August 1 closing date).  My recommendation persists.  Buy CELG for a great short-term high IRR opportunity and buy BMY for a highly attractive higher medium-term IRR opportunity.