Celgene: Bargain Bin At Bristol-Myers Squibb Deal Closing

Nov. 19, 2019 5:17 PM ETCelgene Corporation (CELG), BMY86 Comments

Summary

  • Bristol-Myers expects to close the Celgene acquisition on November 20.
  • The merger is immediately 40% accretive to BMY earnings placing 2020 estimates far above $6 per share.
  • The stock only trades at 7.5x '21 EPS estimates suggesting investors immediately flip the $50 cash payout into additional BMY shares.

As the merger between Bristol-Myers Squibb (NYSE:BMY) and Celgene (NASDAQ:CELG) approaches the finish line, investors face the surprising dilemma of how to handle Celgene trading at $110 as the merger is a day away from closing. Along with my previous recommendation, investors want to own BMY after the merger as the valuation remains cheap.

Image Source: Celgene website

Last Hurdle

Last Friday, Bristol-Myers confirmed the U.S. Federal Trade Commission accepted the consent order due to the divestment of OTEZLA allowing for the parties to close the Celgene merger. The companies target closing the merger on November 20.

The deal is broken out to 1.0 share of Bristol-Myers and $50.00 in cash for each Celgene share. At an updated Bristol-Myers price of $57.65, the current deal value on closing the merger is $107.65 plus the CVR with a potential value of $9.00.

Celgene actually trades above the price of the stock and cash portion of the deal. Investors are placing a $2-3 value on the CVR. The issue is whether the CVR is worth holding and how investors should convert the $50 cash portion of the deal into BMY shares.

My work will focus on whether to hold BMY shares and how to use the $50 cash while Bram de Haas values the CVR at ~$6.50.

Persistent Value

Following a strong Q3, the Bristol-Myers recently raised 2019 EPS guidance to between $4.25 and $4.35. Celgene had a similarly strong quarter beating estimates by $0.28, but the company didn't update 2019 guidance from the previous range of $10.65 to $10.85 due to the pending merger.

The key to the whole deal is that Bristol-Myers forecasts an EPS accretion of greater than 40% in first full year. The previous $4.40 EPS target for 2020 quickly turns into $6.16. Due to the impending merger close, analysts already have hiked the 2020 EPS target to $6.26.

ChartData by YCharts

The 2020 estimate only includes a partial realization of the $2.5 billion in estimated merger synergies. Further, the company estimates $45.0 billion in free cash flow over the next three years that will help reduce interest costs by repaying a large chunk of $45.0 billion in total debt at merger close.

The synergies have a major impact as BMY will have the following share count at the merger close as follows:

  • BMY = 1.63 billion
  • CELG = 735 million
  • $7B buyback = -123 million
  • Total = 2.24 billion

The synergies alone will potentially boost the EPS target to $7 while the debt reduction adds an additional sweetener to EPS targets in 2021 and beyond.

Bristol-Myers only trades at $57 with an EPS likely to approach $8 once all of the synergies and debt repayments occur by 2021. Analysts have the avg. 2021 EPS estimate at $7.56 now placing the P/E ratio at 7.5x. Despite the rally, the stock is exceptionally cheap compared to other biopharma stocks like Pfizer (PFE) and Merck (MRK).

ChartData by YCharts

The above chart doesn't even use the accurate EPS estimate and still indicates the extreme value still persistent in Bristol-Myers following this deal.

Takeaway

The key investor takeaway is that Celgene is actually still in the bargain bin at recent highs near $110. Bristol-Myers bought the stock at an extreme discount with the use of cheap debt and due to the massive synergies of the deal, BMY remains a bargain nearly 50% lower than peer valuations.

The stock may take a hit on the conversion of Celgene shares to Bristol-Myers as some people will cash out those shares, but the smart $7 billion share buyback should cushion this blow. BMY has rallied strong into the merger so investors should look to use the cash to buy the stock on any weakness, but one shouldn't expect any significant downside due to the extreme value down here.

This article was written by

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Stone Fox Capital Advisors, LLC is a registered investment advisor founded in 2010. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA.


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Disclosure: I am/we are long CELG. 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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