Earlier this year I wrote happily how the Casa Ley CVR that was issued in 2015 in connection with the Safeway merger was going to pay out. Another CVR that I acquired in the same year, when Synergetics USA was bought by Valeant Pharmaceuticals (now know as Bausch Health Companies), didn’t have a happy ending. The CVR had some milestones related to product sales from the effective date of the merger till 30 June, 2018, and apparently those weren’t met. I didn’t see a SEC filing or press release about it, but only noticed the disappearance of the CVRs in my brokerage account. Of course, a bit of a disappointing outcome, but not really surprising considering how Valeant imploded almost directly after finishing the acquisition.

Disclosure

No positions anymore

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.

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 :).

Disclosure

Author is long SURG