When Bristol-Myers Squibb (NYSE:BMY) announced on Jan. 3 that it would acquire Celgene (NASDAQ:CELG) for $74 billion, it gave year-long suffering CELG stock owners an exit point.
The only decision Celgene shareholders need to consider next is if they should sell the stock now for around $85 or tender the stock for $50 in cash and one BMY common share for each CELG share held.
Celgene Stock Discounted From Buyout Price
CELG stock trades at an $11.89 discount to the buyout price for two main reasons. First, markets are discounting the possible risk on the deal not closing or getting delayed. Look at NXP Semiconductors (NASDAQ:NXPI) when Qualcomm (NASDAQ:QCOM) first offered to buy the former for $127.50. For months, NXPI stock did not trade very close to the offer price because the markets priced in the risks of the deal failing. While waiting for antitrust approval from China, the company extended the deal several times. Ultimately, the deal fell apart when the Chinese government did not approve the proposed buyout in time.
BMY’s cash and share offer is the second reason Celgene stock trades at a discount to the takeover offer price. Bristol-Myers’ stock fell from around $53 to below $45, albeit briefly, when the company announced the offer. Fundamentally, it has plenty of cash on hand and may easily raise debt to pay for Celgene. At a debt-to-equity ratio of 0.54X, it has the room to lever its balance sheet. Shareholders will allow for share dilution to get Celgene’s IP and product portfolio.
Celgene Bought Out at a Discount
Its forward price-to-earnings ratio is 8.4X, even after shares soared 35% last week, meaning CELG stock still trades at a discount. This is especially true when you consider that the stock is still 23% below its 52-week high. Still, Celgene’s management levered the company’s balance sheet enough to scare off investors. Its acquisition of Juno Therapeutics in January 2018 cost it $9 billion but raised its debt-to-equity to four times.
Fundamentally, CELG’s cash cow for over the last decade, Revlimid, which treats Multiple Myeloma, faces stiff competition from more agile, innovative competitors. It is only a matter of time before they release new products into first-line multiple myeloma therapy, eroding Celgene’s Revlimid sales.
Post-Buyout Expectations
Celgene’s poor leadership led to the underperformance in its shares. The company failed to advance its pipeline of drugs in 2018. When BMY takes over, it will probably restructure Celgene management while cutting operating costs. For those two reasons, investors tendering CELG stock for BMY should expect BMY stock to trade higher in the years to come.
Currently, Celgene shareholders do not earn any dividend while BMY shareholders get a dividend yielding 3.5%. If BMY stock falls in the months to come, lifting the dividend yield to levels above that of Pfizer (NYSE:PFE), at 3.35% and Merck & Co., Inc. (NYSE:MRK), at 2.88%, Celgene stock investors may even want to switch their shares for BMY stock on the open market.
Bottom Line on CELG Stock
Celgene stockholders could wait until the deal is closed to make the most or sell now to avoid the buyout risks as previously mentioned. But by selling now, investors leave a big discount on the table. If BMY is getting Celgene for too good a price, a white knight may come to bid a higher price. There is no right decision on whether to sell Celgene stock now or to hold it until the deal.
Patient investors who are bullish on BMY’s prospects will want to wait for the deal’s completion, while skittish investors could sell now and look for other biotech stock ideas trading at a discount.
As of this writing, Chris Lau owned shares of NXPI.
