Shares of Celgene (CELG) are under pressure after a major Bristol-Myers Squibb (BMY) shareholder said it would not support the acquisition. Wellington Management said it thinks Bristol-Myers shareholders are accepting too much risk and that Celgene shareholders are getting the drugmaker’s shares at well below implied asset value. Another shareholder, Starboard Value, said it also opposes the deal.
WELLINGTON OPPOSES DEAL: Wellington Management, the largest institutional holder of Bristol-Myers Squibb’s common stock at about 8%, said in a statement on Wednesday afternoon that it does not support the company’s $74B plan to buy Celgene. Wellington said the acquisition asks Bristol’s shareholders to accept too much risk while there are other paths to create value for shareholders. It also said it is worried that the execution of the acquisition will be more difficult than depicted by company management. Wellington said that while it agrees that Bristol-Myers should be active in business development that secures differentiated science and broadens the future revenue base, it does not believe that the Celgene transaction is “an attractive path towards accomplishing this goal.” It said it is basing its conclusion on three tenets: “1) the transaction asks BMY shareholders to accept too much risk and the terms offer BMY shares to CELG shareholders at a price well below implied asset value; 2) execution success could be more difficult to achieve than depicted by company management; and 3) alternative paths to create value for BMY shareholders could be more attractive.”
STARBOARD ALSO OPPOSED: Starboard Value, another Bristol-Myers shareholder, said on Thursday morning that it delivered an open letter to the company’s board, calling the proposed deal with Celgene “ill-advised.” and “not in the best interests of Bristol-Myers stockholders.” It said it will be filing preliminary proxy materials in opposition to the merger “in the coming days.” In the letter, Starboard said it intends to vote all of its shares against the proposals related to the proposed acquisition, and, should the transaction be voted down, it has also nominated a slate of director candidates who it would seek to elect at the 2019 annual meeting. It “Additionally, under separate cover, we will be delivering to Bristol-Myers a books and records demand under Delaware law requesting that they provide us with information that will allow us to further investigate the facts and circumstances leading up to, and including, the process and diligence that led to the proposed acquisition of Celgene,” Starboard added.
BRISTOL’S RESPONSE: Bristol-Myers said in a statement of its own that it believes the Celgene acquisition is taking place at an attractive price, and that the transaction “presents an important and unique opportunity to create sustainable value.” It added that its board and management team have held “numerous conversations and meetings” with investors since announcing the Celgene deal.
WHAT’S NOTABLE: On February 20, Bristol-Myers Squibb said that
activist hedge fund Starboard Value owns a 1M share stake in the company. The hedge fund also nominated for the Bristol-Myers board Starboard’s CEO and co-founder, Jeffrey Smith, as well as John Leonard, James Tyree, Steven Shulman and Janet Vergis. On February 5, Starboard filed an HSR Act notification and report to allow it to acquire shares of Bristol-Myers common stock. A prior report from Reuters indicated that Starboard asked a proxy solicitor to evaluate the level of support among Bristol-Myers investors for the company’s planned acquisition of Celgene. According to a media reports, Dodge & Cox, Bristol-Myers’ fifth largest shareholder, is also “unhappy” with the deal.
Separately on February 20, Bristol-Myers said that the Celgene deal is
“on track” to close during the third quarter. “The combination with Celgene will create a leading biopharma with increased scale, while maintaining the same agility and a focus on delivering for patients in core disease areas of high-unmet medical need. The pipeline of the combined company provides significant near-, medium- and long-term opportunities for value creation,” Bristol-Myers said at the time. In addition to six expected near-term product launches representing more than $15B in revenue potential, the company said that the combination will “greatly increase Bristol-Myers Squibb’s Phase I and II assets, which will provide the next set of registrational opportunities in core therapeutic areas.”
ANALYST COMMENTARY: Following Wellington Management’s statement opposing the deal, Baird analyst Brian Skorney said he may have miscalculated the passivity of large-cap investors when it came to the deal. He believes the deal will go through as it appears to beneficial to Bristol, but risk has now been introduced to the deal and the share price of Celgene.
Jefferies analyst Michael Yee said that while it is currently unclear if other Bristol shareholders who are still in the stock will follow suit with Wellington in opposing the Celgene deal, it is possible that at least one other long-term top five shareholder may disagree with the Celgene transaction. However, he thinks various data points suggest it is still a major “uphill battle” to block to deal and believes it will still likely occur. The analyst said he finds it important that according to his estimates, there is 25% “material overlap” in the holder bases that own both Bristol and Celgene.
William Blair analyst Andy Hsieh says that despite recent negative news flow, he believes Celgene’s takeover by Bristol-Myers will ultimately close by the end of Q3. Despite the headline risk that could contribute to near-term stock volatility from major Bristol shareholders like Wellington Management and Starboard Value, the deal contains favorable terms for shareholders from both companies, Hsieh said.
