M&A Updates: Cresco Labs/Origin House Transaction Is Not Worth The Risk Anymore

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Includes: CRLBF, EPIX, ILMN, NTR, ORHOF, PACB, RLM
by: Special Situation Investor
Summary

Essa Pharma/RLM transaction got approved by the shareholders.

ILMN/PACB spread has widened significantly and might present a good opportunity to enter.

Nutrien/Ruralco received some concerns from ACCC, but it is not a deal breaker.

Updates:

I did not expect that Essa Pharma (EPIX)/Realm Therapeutics (RLM) transaction (previous write up here) will actually get approved, but unfortunately it happened. Effective date is set on the 2nd of July. As I said earlier, this deal is a complete rip off of the shareholders, but of course, given the competence of RLM management, it could’ve been worse (than this 11% upside).

Cresco Labs (OTCQX:CRLBF) - Origin House (OTCQX:ORHOF)

Spread: 38%

Since the posting of my initial write up, the biggest US cannabis merger has already managed to get the shareholder approval (June 10), however the things appeared to be much more complicated on the regulatory side. DOJ has issued a second request causing the spread to increase more than threefold and although the size of it is very appealing, the risk here is great too. Not only that, less than 4% of the total number of transactions get the second request and 70% of those are blocked, but this is also a large scale cannabis deal, which I think significantly increases the risk here. So the deal was supposed to close this month, however now it will be delayed to Q4. Overall, the risk here seems a bit too much.

Illumina (ILMN) - Pacific Biosciences (PACB)

Spread: 32%

DNA sequencing machine producer Illumina is acquiring biotechnology company Pacific Biosciences for $8 in cash per share. This transaction was expected to close mid 2019, but due to two regulatory (UK and US) blessings still pending and CMA (UK antitrust) decision to go for phase 2 investigation, closing is now estimated in Q4. Because of the additional regulatory risk and not the best recent performance of PACB the spread recently (since last month) widened from 8% to 32%, which I think is way too much and this might provide a good opportunity for the investors. The main thing is that companies operate in different segments (Illumina’s long-read vs PACB short-read gene sequencing) and companies have mentioned it many times that due to that antitrust approval should not be an issue. Moreover, Illumina has agreed to $98m termination fee here, which clearly shows their confidence in completing this deal. Downside to pre-announcement price is about 28%, but with the termination fee cash would go down to about 18%. Of course, PACB’s recent negative growth (recent three quarter had negative revenue growth of about 20%) should impact the downside here, but on the other hand, they have recently launched their new upgraded System II sequencing system and it might have been a reason for the lack of revenues, as some clients might have delayed their purchases in anticipation of the 8x more powerful new system.

New:

Nutrien (NTR) - Ruralco

Spread: 6%. Closing: Q3-Q4

Nutrien, a Canada based global supplier of crop nutrients is acquiring Australian agriservices business Ruralco. Consideration stands at A$4.4/share in cash, which is a price Ruralco has used to trade only back in 2008. The closing was estimated to be in early August, however after ACCC (Australian antitrust) has issued a statement of issues it most likely will get delayed. ACCC has noted 7 areas in which, after the merger competition will become limited and while this is a hindrance for the deal, it is also definitely not seen as a dealbreaker by the market (given the spread size) and will most likely be tackled by some divestments agreement. Other required approvals are needed from FIRB (foreign investments review board) and Ruralco shareholders (50% of total shareholders must participate and 75% of the votes have to vote in favor of the transaction). The meeting was supposed to happen on the 17th of July, but now may also be delayed. By the way, before closing the company will pay out 90 cents of special dividend, which will be deducted from the consideration price, however the Australian investors which are entitled to franking credits may get a tax offset up to 39 cents.

This transaction also makes sense from the point of business synergies as Nutrien will add 500 locations to their retail segment and Ruralco will get additional support in this stage of consolidation in world's agribusiness. So, overall, this is an interesting situation to track.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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