54% WAAR Arbitrage in Juno Therapeutics Common Stock

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Main Topic: 54% WAAR Arbitrage in Juno Therapeutics Common Stock

This podcast episode is about the results of the arbitrage in Juno Therapeutics, Inc., which I outlined in episode 113. In that episode, I mentioned that I was releasing that episode one day too late to get the meat of the arbitrage. Stuff happens.

Our goal with arbitrage is to minimize our holding period and to maximize our weighted average annualized return of 20% or more. This is the story of the arbitrage in the stock of Juno Therapeutics.

On January 22, 2018, Celgene Corporation (NASDAQ:CELG) announced the acquisition of Juno Therapeutics, Inc. (JUNO) for $87.00 per share in cash, per the merger agreement signed on January 21, 2018. The deal would be completed through a tender offer for all the shares of JUNO that Celgene did no already own.

The transaction would be accomplished through a tender offer and would ultimately result (for me) in a profit of $4,420 and a weighted-average annualized return of 54.6%.

By preferring all-cash payments, I know exactly what I’m going to get in an arbitrage, and I won’t be taking chances trading my cash for stock that may or may not perform the way I want.

The announcement of the transaction stated the purchase price of $87.00 would be all cash. That makes this checklist item a PASS.

Key Dates:

Date announced – 1/22/2018

Commencement of Tender Offer – 2/2/2018

Date Tender Offer Expired – 3/2/2018 (midnight Eastern Time)

Tender Offer Results Announced 3/5/2018

Buyer Pays a Fair Price

A fair price that does not significantly under-value or over-value a company is one piece of the puzzle that should make for a smooth transaction.

Celgene would be paying about $9 billion for Juno, which was a 28% premium over the closing price of the shares on January 19, 2018 before the announcement of the deal. Given the lack of profitability, this was a generous price.

About the Target

Juno Therapeutics, Inc. is an integrated biopharmaceutical company focused on developing innovative cellular immunotherapies for the treatment of cancer. Founded on the vision that the use of human cells as therapeutic entities will drive one of the next important phases in medicine, Juno has developed cell-based cancer immunotherapies based on chimeric antigen receptor and high-affinity T cell receptor technologies to genetically engineer T cells to recognize and kill cancer. Several product candidates have shown compelling clinical responses in clinical trials in refractory leukemia and lymphoma conducted to date.

About the Buyer

Celgene Corporation, headquartered in Summit, New Jersey, is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of innovative therapies for the treatment of cancer and inflammatory diseases through next-generation solutions in protein homeostasis, immuno-oncology, epigenetics, immunology and neuro-inflammation.

Big Fish Swallowing A Little Fish

I primarily look for situations where a large company is buying a much smaller company, known as a “tuck-in” acquisition. There is much less of a risk that regulators will be concerned about a monopoly with a tuck-in than a merger of equal size companies, or the rare mouse swallowing an elephant type of transaction.

In this case, Celgene had a market cap of $70 billion versus the transaction size of $10 billion. This checklist item is a PASS.

Little Fish Profitable and/or Valuable

If you buy into a simple merger arbitrage, you are buying the stock of the target. Like any other investment, it is important to understand the value of the underlying company. Why? If the transaction doesn’t close, you may be stuck owning the target company, so you should know what it is worth.

The value of JUNO was more related to the value of its products than its profitability. Although JUNO was not profitable, given that Celgene already owned 9.7% of  JUNO stock, and  had a history of investing in JUNO, I viewed this checklist item as not a deal breaker.

Further, there were two directors on JUNO’s board that had to recuse themselves because of “their affiliation or past affiliation with the Celgene Parties”.

Thus, this checklist item was a FAIL but I waived it.

Other Bidders Backstop the Target's Value

One way to see that the Target has some underlying value is to check if there were other bidders during the negotiation stage of the transaction. This will be disclosed as a “history of the transaction” in a filing with the SEC.

This checklist item was a FAIL as JUNO’s board did not shop the company, stating that it was “not actively seeking a sale” at the time of Celgene’s initial offer, which was for about $80.00 per share. Given the other facts in this arbitrage, including that Celgene already owned 10%, and that the threshold for a successful tender was only above 50% of all outstanding share, and that the transaction price seemed fair, I waived this requirement.

Offer is Not Hostile / The Target's Board Approved the Transaction

As a general rule, Warren Buffett has said that he never gets involved in a hostile takeover because the outcome is unknown. I have seen plenty of hostile takeover attempts fail, and Boards of Directors have a number of defenses they can put up successfully to keep hostile takeovers from succeeding.

Both Boards approved of this transaction, and there had been some history between these companies before the offer was made. This checklist item was a PASS.

Some transactions are dependent upon the Buyer raising debt to fund the purchase of the Target. This requirement puts a wrinkle in the transaction if the lender balks for any number of reasons when it is time to fund the transaction. Having to raise debt capital may also indicate the Buyer is not on the kind of financial footing it should be before attempting such an acquisition.

Celgene, in the SC TO-T, announced that the funds for the purchase will come from existing cash, credit facility, or issuance of equity or debt. There was no financing condition to the offer. So this checklist item was a PASS.

Major Shareholders are Supportive

Most of the time, a transaction will require the shareholders of a company to vote for the transaction at a special meeting. If there are a few large shareholders that have agreed to vote for the deal, this may ensure that the shareholder vote will be successful, which is a major step in getting a deal to close.

At the time the deal was announced, Celgene owned 9.7% of JUNO common stock. The other insiders did not own a large amount, however. The effect of this holding is that Celgene already owned 20% of the stock needed to effect a successful tender offer. Given the Celgene holding, and the low threshold to complete the acquisition, this checklist item is a PASS.

Most merger agreements will provide for either a deposit (in the case of really small deals) or a termination fee in case there is either an overbid or the deal is scuttled by regulators or a breach of the merger agreement by the Buyer. This will make it expensive for the Buyer to fail at getting the deal closed.

JUNO would be required to pay Celgene a Termination Fee of $300mm in cash. Celgene would be required to pay JUNO a $600mm termination fee in cash. I would say that both parties has skin in the game and this checklist item is a PASS.

Under the Hart-Scott-Rodino Antitrust Improvements Act and related rules (the “HSR Act”), certain transactions, including the merger, may not be completed until notifications have been given and information furnished to the Antitrust Division of the Department of Justice and the Federal Trade Commission and all statutory waiting period requirements have been satisfied. This applies only to transactions with a value of $80 million or more.

Regulatory approval was definitely required in this case under Hart-Scott-Rodino Act. The companies had applied shortly after the merger agreement was reached. In analyzing the regulatory situation, I concluded that given the size difference between the companies, and the clear lack of any type of monopoly or anti-trust issues, the transaction would not be held up by regulators. Further, the Hart-Scott-Rodino deadline was only a few days after I began initiating my position, such that 4/6ths of the position was taken AFTER REGULATORY APPROVAL. This is a key point and this checklist item was a PASS.

Is a Squeeze-Out Included?

Yes, if you held stock and did not tender it (and had not voted for the deal), then Celgene would go into court to get approval to buy out any remaining shareholders at the deal price. Just for fun, and as an experiment, I left one share unsold and un-tendered to see how long that process takes.

Why compete against the big boys if we don’t need to? By focusing on smaller transactions we will have less competition for acquiring the block of stock that we want and there is a greater possibility of a wide spread in the deal (difference between the transaction price and what we can buy the stock for).

With a market cap of $10 billion, this deal was large enough to interest smaller funds, and also kept the spread pretty tight so buying in stock at the market price meant it getting filled at the ask. This is not usually a make or break type of checklist item.

This transaction met all of the most important checklist items:

  • All cash consideration – PASS
  • Big fish swallowing a little fish – PASS
  • Fair price - PASS
  • Little fish profitable and/or  valuable - WAIVE
  • Boards approved - PASS
  • Major shareholders are supportive – PASS
  • No financing or abnormal contingencies - PASS
  • Low risk of regulatory intervention - PASS
  • Low competition for stock - WAIVE
  • At least a 1% actual return and 20% annualized return - PASS
  • There were three possible outcomes within a range:

    1. The tender offer failed. In this case, Celgene would extend the tender offer and attempt to gain support OR offer a higher price.
    2. The tender is close, but does not quite meet the threshold 50% + requirement. Celgene would extend the tender offer and attempt to gain support.
    3. The tender offer would be successful and the annualized return would be 40% - 50%

    Taking the Position

    After filling out my arbitrage checklist and determining that this arbitrage is one that I want to get involved with, I will start taking a position immediately, but buy over time and try to back weight the purchase activity to hold the position for the shortest possible average time.

    The tender offer expired March 2, 1018. My initial position was taken February 16, 2018 at a cost of $85.24.

    Enter your text here...


    I continued to buy until February 27, 2018 when the price moved up above $86.64 and I had a position size that I was comfortable with ($520K and 5,999 shares, not including the one share I retained as an experiment).


    The Profit

    The proper way to analyze your return on investment for an arbitrage situation like this is to weight-average both your holding period and your annualized returns. The reason is that the positions are purchased all along the way and, therefore, the holding period becomes shorter and shorter and the annualized return can grow dramatically.


    To illustrate this point, let’s take the first position bought 02/16/2018 as an example. That position was held for 14 days and had an actual return of 1.9% and therefore a 48.9% annualized return. Not too shabby!

    Now let’s take the position acquired on 02/27/2012 (5 days before the close). This position was held for 3 days and had an actual return of 0.2%, but an annualized return of 28%!  I put on positions like this given the high probability of the tender completing successfully. Yes, it’s a somewhat low actual return, but its easy money with very low risk.

    When it came time to tendering, I made a rooky mistake. I waited one day too late to tender my shares. The last day to tender shares was actually February 28. I had forgotten that February is only 28 days,  thus I was forced to sell the shares instead of tendering them.

    Shame on me, but oh well, still achieved a 54.6% weighted average annual return!


    Ask JB: Why do companies buy back stock?

    What does it mean for a company that announces it will buy back shares? (self.investing)

    submitted  by jcarmona24

    I own over 100 shares of Adidas (OTC: $ADDYY) and they release their earnings tomorrow morning in Germany. I am expecting that they beat analysts estimates but they just announced they are going to buy back shares of the company. It basically is equivalent to a dividend to shareholders..but why does it make sense for a company to do that? Also would that be a green signal for investors heading into earnings tomorrow morning?

    JB Says: To hear my answer, listen to the episode!

    JB Says: To hear my answer, listen to the episode!

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    About the Author

    Jeremy Scott Bailey is an investor, author, entrepreneur and host of the "What Works In Investing?" podcast now available on iTunes. He is founder and Chief Investment Officer of Burgeón Group, Inc. an investment advisory firm that provides portfolio management services to families and individuals.

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