VIVO - Meridian Biosciences: Why I Moved On But May Go Back In

Summary

• Meridian Biosciences released an update saying it set the closing date for its merger on Jan. 31.
• The stated reason is that the acquiring parties wanted some extra time to get the financing.
• The parties waived a Jan. 6 termination date and otherwise there doesn't appear to be any hangups.
• I sold on the news, but depending on where the share price goes from here (it declined a bit) I may buy back in.

SD Biosensor / SJL Partners is acquiring Meridian Bioscience ( VIVO ) for $34 per share in cash. I sold my small position yesterday at $33.62. The current spread is slightly wider (pre-market) and sits at $0.61. That leaves 1.8% of upside toward the close.

Yesterday the parties announced a Jan. 31 closing date and the parties waived a Jan. 6 termination right. Assuming they make the closing date (which I expect), there are 49 days left until closing. The reason given in the filing is the following:

In agreeing to consummate the Merger on January 31, 2023, the board of directors of Meridian determined that it is in the best interest of Meridian’s shareholders to provide the Parent Parties additional time to consummate the Merger in order to finalize their financing (which is not a condition to the consummation of the Merger).

CFIUS wasn't an obstacle since Nov. 21, but some uncertainty remained around a DOJ LeadCare legal matter. In the recent 10-K it says:

As of September 30, 2022, in accordance with applicable accounting guidance, the Company believes a loss is probable in the DOJ LeadCare legal matter and has accrued $10,000 as an estimate of the cost to resolve the DOJ LeadCare legal matter, which is reflected in litigation and select legal costs within the Consolidated Statement of Operations for the year ended September 30, 2022. The Company cannot predict when the investigation will be resolved or the outcome of the investigation, and the ultimate resolution of the DOJ LeadCare legal matter may exceed the amount accrued at September 30, 2022 and could be material to the Company. Expense for attorneys’ fees related to this matter totaling $3,510, $2,803 and $2,035 is included within the Consolidated Statements of Operations for the years ended September 30, 2022, 2021 and 2020, respectively. See “Lead Testing Matters” beginning on page 32 within MD&A.

VIVO is being taken out at a $1.46 billion valuation. In this latest release, there's no mention of the DOJ investigation. This suggests it's not enough of uncertainty for the buyer any more to prohibit closing. Shareholders also approved and antitrust hasn't been an issue. The reason I got out is simply the return profile. At $33.62 I was looking at an 8.7% annualized return. That's really not too bad, but I try to aim a little bit higher, especially as I need to leave some room for failure. Shares dropped back to $33.39 which translates into a 14.4% annualized return. Keep in mind both figures assume a 100% closing rate from here on out which may be optimistic. I don't see how this could get derailed but that doesn't mean it couldn't happen. If there's one thing I've learned the hard way it is that many strange things can occur. If the merger fails I'd expect the company to fall back to around ~$22 or 34% down.

That may seem a pessimistic take but revenue and EPS have been adjusted downward by analysts since the merger announcement. On the other hand, it did comfortably beat earnings in the last quarter. I'll repeat that I believe this deal is very unlikely to break from here on out but if it does, it will be painful.

I'm not sure how this will trade after yesterday's news. Because the merger is set to close within ~50 days the annualized return is very sensitive to a few cents in price up or down. I put together the above table to quickly assess what the ballpark return looks like at various prices. As the merger progresses toward the closing date, assuming no negative news, the annualized returns quickly increase.

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