Synergetics USA merger arbitrage: get a CVR (almost) for free

Synergetics USA, Inc. (SURG) is a tiny manufacturer of medical surgical devices with a $168 million market cap that is being acquired by Valeant Pharmaceuticals International, Inc. (VRX), the well-known, and somewhat controversial, pharmaceutical behemoth. VRX is paying $6.50 per share plus a CVR that could pay out an additional $1/share if certain sales milestones are achieved. Because the CVR will be non-tradable, non-transferable and is hard to value you have all the right ingredients for an attractive special situation.

SURG Ophthalmic products subject to the CVR

Since the CVR is non-tradable and non-transferable there are going to be a lot of people who would prefer not to own it. It will be totally illiquid and is going to be an accounting headache for funds. At the same time valuing a CVR is pretty hard. The reason for a CVR in a merger is usually because the buyer and the seller couldn’t agree on the value of some asset. And if the two parties who are most knowledge about the subject can’t figure it out, who can?

I don’t think I can. But that doesn’t mean that I have no idea how much it is worth since the CVR itself is a big hint since it is the product of the negotiations of two knowledgeable parties. This probably means that milestones are set at levels that are reachable, but not easy. So my guess would be that when you see a CVR with a payout between $0 and $1 the intrinsic value is somewhere between $0.25 and $0.75, and probably close at the low-end of that range because I think the second milestone is usually an optimistic target.

If we assume that the value of the CVR is $0.25 the absolute spread between the current price ($6.57) and value ($6.75) is just 2.7%. That doesn’t sound like a lot, but I think that the probability that this deal will close is almost 100% and since it will close in roughly two weeks time tying up some cash in this stock doesn’t carry a large opportunity cost. VRX is acquiring the company using a tender offer that will expire next week on Wednesday, October 14.

Thought that this was a good spot to put some idle cash at work :).


Author is long SURG

9 thoughts on “Synergetics USA merger arbitrage: get a CVR (almost) for free

  1. rijk

    not sure about the risk/reward here, unless vrx pulls one of their sneaky mega price increases, the probability to meet cvr targets appears remote as oem sales, which is the portion of the portfolio that is actually growing, are excluded

  2. Brent

    So to calculate the return…Is this correct?

    You pay out the stock price $6.57….Receive cash of $6.50 + the CVR

    So upfront cost is $0.07. The CVR you write isn’t tradable so it won’t have a nominal value in your account?

    Is the pay out on the CVR, binary of $0 and $1? or is it a sliding scale? Because here the intrinsic value you estimate of $0.25-$0.75 would only be realisable if it is a sliding scale….

    What is the time limit on the CVR?

    1. Alpha Vulture Post author

      If you flip a coin and get $0 when it is tails and $1 when it is heads the value of the bet is $0.50 even though that result can never be realized. Wrt to you questions about the characteristics of the CVR: check the tender offer document (first link in my blog post).

  3. Brian

    I think I’d rather just by PCP at $230 and then wait for Uncle Warren to buy it from me at $235. The time frame might be a bit longer, but the odds are probably much greater.

  4. BN

    Never invested in CVRs before, but I had a general question. Ostensibly, mutual funds and the sort can’t hold these things in their portfolio. What do holders do when they receive the CVRs if they are non-tradable/non-transferable? Private sales? If so, through what agent/exchange?

  5. Haasje

    I like this idea, thnx for posting it. What do you think about the proposition of not tendering? Is there a % chance the bid is upped for the remaining shares? As the cost of holding out is rather limited…


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