As I was trying to research a little bit how to value a pipeline of drugs still in development (Actelion spin-off), I stumbled across the so-called “Contingent Value Rights” (CVRs) which are often used in Pharma takeovers.
A CVR is somehow similar to a tracking stock with the exception that the CVR often tracks a more specific item such as a single product or in case of many Pharma M&A transactions, the outcome of a certain drug development project.
Acquirers and sellers sometimes use this instrument if they cannot agree on the value of an under development drug. The idea behind is that the seller keeps the upside and the buyer doesn’t need to pay upfront for some very risky future cashflows.
Sanofi/Genzyme Lemtrada CVR
When Sanofi took over Gynzme in 2011 such a situation crystalized. This is from a 2015 NYT story:
Yesterday, Johnson and Johnson announced that they intend to acquire Actelion, the Swiss Biotech company for 280 USD per share.
The stock price jumped to around 272 CHF/USD right after the announcement indicating a relatively high probability of closing. J&J has enough money on their bank account and according to the press, most Actelion shareholders should be happy.
Closing date is targeted as June 30th. So if everything goes according to plan, this would mean ~2,9% yield for 5 months which is not bad but not that great either (as there are always risks) , so why bother ?
However there is an interesting specialty in this case which I didn’t see when I first looked into it. The official announcement contained this potential “golden nugget”:
Uniper /E.On Spin-off
In David Einhorn’s latest letter to investors he mentions the following:
We purchased E.ON (Germany: EOAN) in the fourth quarter of 2015. When EOAN spun out Uniper (Germany: UN01) in September, we kept the UN01 shares we received at €10.02 in thetransaction and sold the balance of our EOAN stake at a modest loss to redeploy that capital into additional UN01 shares. We believe the market does not appreciate the earnings stability o fUN01’s power generation and natural gas logistics assets. Further, the incoming management team is incentivized and has committed to cost-cutting, which will create a powerful cash flow profile. We own the company at 6x our 2017 earnings estimate.
So looking back this was a smart move. Although Uniper’s stock price came back a little bit, Einhorn is still up like 35% and has done clearly better than holding on E.On:
The Company / Spin-off
Gocompare.com (GoCo) has been spun-off from parent Esure in the beginning of November, a week before the US elections and only a few days before Italgas SpA. As a “parting gift”, Esure took out a special dividend of about 75 mn GBP financed by some net cash and a 70 mn GBP loan before spinning the company off-
In my understanding, the major reason for the spin-off was that Esure, the listed UK online direct insurer was short in solvency capital and that this transaction improved the solvency substantially.
Every Esure investor got one GoCo share for an Esure share. Interestingly, Toscafund, the second largest shareholder only holds 14% in Goco compared to 16,7 for Esure, so they seem to have sold some shares.
Monday, Sep 12th will be the first trading day for Uniper, the E.On spin-off. E.On shareholders will get one Uniper share for each 10 E.On shares they are holding.
Just to recap: Uniper will contain all the (unwanted) power generation assets of E.on, so all the “fossil fuel” power plants, the Russian assets and the Swedish nuclear plants plus some other stuff. The German Nuclear assets (and the corresponding liabilities) will remain at E.on due to the reasons I mentioned in the last post.
Uniper is clearly an ugly Duck, maybe the “most ugliest spin-off” I have seen since I started the blog. If we look into the most recent investor presentation, it is clear that you have a problem when the 3 listed growth projects are a German Hard Coal Power plant, q Russian power plant closed due to an accident which will reopen in 2018 and some strange dealings around the North Stream gas pipeline (page 9.). It doesn’t help either that Uniper had to take a 3,8 bn EUR pre tax write down in the first 6 months of 2016.That makes the duck still uglier.
Greenlight Re update:
As some readers might remember, I bought shares of Greenlight Re, the Bermuda Reinsurer with investment advise from David Einhorn back in December 2015, but then sold them one month later, triggered by the insight that I don’t really understand his investment criteria. Looking back, the decision to sell doesn’t look very smart, as the stock priced since then increased by around 18% in USD (or 14% in EUR). YTD the stock is up 14,8% in USD.
In early August, Greenlight Re filed their 6M report. Interestingly the NAV per share declined by -4% from 22.20 USD to 21,32 USD per share.