Trade Idea: Buy $PRNB for Merger Offer Revision

Quick trade idea - buy $PRNB. Upside is high-single digits or more. Downside is ~1% to $100. Current price is $101.07. May be a replacement for portfolio cash. Highly speculative.

Principia Biopharma is a clinical stage biopharma company that has agreed to be acquired by Sanofi, the French biopharma major.

The deal was announced on August 17th for $100/share and is expected to close in 4Q20. Bid is all cash.

On August 25th, BVF Partners LP filed a 13D arguing that the deal consideration materially undervalues $PRNB. BVF is a 15% holder of Principia directly and indirectly through Nov 2020 $100 calls. 

Based on a quick read of the merger agreement and press release, there is no shareholder vote required. 50% + 1 shares must be tendered for the merger to be completed. There are several large holders in the stock that could refuse to tender and hold out for a better offer. 

BVF owns 15%. Fidelity owns 15% (across multiple funds). Glaxo’s VC arm and Redmile, another VC, own a combined 17%.  T. Rowe owns ~5.7%. Cormorant owns 4.8%. Baker Bros own 4.7%. Wellington owns 4.5%. There are enough smart and engaged shareholders to potentially force Sanofi to bump up their bid. 

This is a highly speculative trade - but the key is that your downside is 1% and you get taken out in a few months if the holdouts can’t force a better deal. I haven’t looked at a lot of these tender holdout situations, but the strategy didn’t work with Spark Therapeutics. 

That’s the idea. Potential for a $5+ price bump ...or a lot more if you believe BVF’s comparison to Momenta. Downside is 1%. That seems like a good risk-reward to me. A potential way to get leverage on this trade would be by buying the Feb $100 calls which are trading <$2. This may have a better chance of being ITM because they extend further than Sanofi’s proposed close date. You can also lose 100% of your premium though.

Kind of a punter trade, but here we are. At least your downside is protected.