MEDA AB (MEDAA SS): NEW RECOMMENDED DEAL / MERGER ARBITRAGE:  Following an unsuccessful attempt from Mylan to buy Meda for SEK 145 in April 2014, Meda board have now unanimously recommended Mylan’s offer of SEK165 for 80% in cash and 20% in Mylan shares (subject to a collar), in addition to Meda’s 2015 dividend of SEK 2.5 per  share. The offer represents a premium of 92% vs Meda’s SEK 86 10-Feb-16 closing price and a 9% premium to the 52-week high of SEK 152.

Deal is conditional on 90% Meda shareholder acceptances (waivable), approval from relevant competition authorities (most likely EC, US HSR, China MOFCOM, Turkish Rekabet Kurumu and Russia FAS approval), but not subject to any financing conditions, nor approval by Mylan shareholders. Irrevocables from 30% of outstanding Meda shares, with 2 largest shareholders, Stena Sessan Rederi and Fidim, which own 20.7% and 9.03% respectively, have undertaken to accept the Offer, subject to certain conditions.

Medium-term timetable: indicative 6 months timetable with offer doc to be published May 19, with estimated acceptance period of May 20 until Jul 29 and settlement Aug 5.

Collar structure consideration:

  • Mylan share price collar range of $30.78 to $50.74
  • Based on 20 trading day VWAP 2 days prior to close
  • Using fixed exchange rate of USDSEK of 8.4158 – hence no FX risk on collar structure
  • Offer consideration:
    • If MYL US< $30.78: 1 MEDAA SS = SEK 132 cash + SEK 2.5 dvd + 0.2* (100/(MYL US *8.4158))
    • If $30.78 < MYL US< $50.74: 1 MEDAA SS = SEK 132 cash + SEK 2.5 dvd + 0.2* 0.386* MYL US *8.4158 (or at prevalent SEKUSD exchange rate)
    • If MYL > $50.74: 1 MEDAA SS = SEK 132 cash + SEK 2.5 dvd + 0.2* (165/(MYL US*8.4158))

With MYL trading down more than 14% to USD 43.5, current offer value would represent about SEK 162.7 (less the value of the (long $30.78 put, short $ 50.74 call) collar optionality of about SEK 1)  for Meda, or about 11% spread (or 22% pa) to Meda trading around SEK 147.

Although there is (limited) overlap between the 2 companies in the allergy therapeutic, allergy and respiratory product segments, any regulatory risk should be merely timing risk (with potential of some smaller required generic products divestitures).  Companies’ targeted August 2016 deal closing and public deal commentary that “They don’t anticipate any antitrust issues, given that there are no overlaps on a geographical basis”, also shows high confidence for the (extended) regulatory global reviews.

Although there is a) limited regulatory blocking risk, b) no tax inversion risk, c) limited financing risk (pro-forma net leverage Mylan to be about 3.5x); d) no Mylan shareholder approval risk (deal doesn’t require Mylan shareholder approval) and e) limited expected Meda shareholder resistance given very steep 90%+ premium and irrevocables from 2 largest (previously opposing) Meda shareholders, spread should nevertheless be much wider given a) potential new counter on Mylan by the likes of Teva (although unlikely given Mylan’s Dutch Stichting poison pill, any significant negative 10-15%+ Mylan share price move on this Meda deal announcement could bring new suitors out of the woodworks -and you don’t want to be holding this spread on that scenario), b) collar consideration structure (which will require delta hedging until very end of deal), and c) huge 40-50% downside. No rush to set up – would await and see how steep Mylan falls before considering spread setup.