Quick Pitch: Liminal BioSciences (LMNL)

Merger Arbitrage – 11% Upside

A potential buyout of a busted biopharma company by a controlling shareholder. The current spread seems to exist due to the non-binding nature of the proposal and a steep 50% downside to pre-announcement prices. However, the bidder is a highly credible VC firm, which knows the target company inside out. There is a solid chance the buyout will go through.

Liminal Biosciences is a $21m market cap pre-clinical stage biopharma focused on small molecule therapeutics. Last week, the company received a take-private offer at $7.50/share from its controlling shareholder VC firm Thomvest Asset Management (owns 64% stake). LMNL has formed a special committee that is reviewing the proposal. Approval of LMNL’s minority shareholders would be required. I think both consents will be easily secured.

Thomvest has been involved in LMNL for quite some time and acted as the company’s main financier. In the proposal letter, Thomvest highlighted that it is highly familiar with LMNL and would like to proceed with a transaction expeditiously. Thomvest Asset Management is the investment vehicle of Peter Thomson who is a part of the billionaire family behind the Thomson Reuters conglomerate. Peter Thomson himself indirectly holds around 10% stake in Thompson Reuters.

A buyout of a tiny biopharma seems a bit unusual for the VC firm as it doesn’t have any other holdings in the space and is mostly engaged in the software sector. Nonetheless, the buyer has been involved with LMNL since 2013 when it provided the first loan to the company, followed by a number of subsequent loan agreements between the two parties over the years. As part of LMNL’s restructuring process in 2019, most of Thomvest’s debt was converted to common stock making it the controlling stockholder (stake increased from 3% to 67% at the time). Thomvest currently has one LMNL board seat out of six, however, four other directors were changed after Thomvest took over as controlling shareholder. I have not found the composition of the special committee, however, a three-person committee would necessarily include two ‘independent’ directors appointed after the majority stake acquisition by Thomvest.

LMNL’s net cash stood at $23m as of Dec’22 (less CDMO obligations), while the company has been burning around $5m/quarter on average. As a standalone, LMNL will run out of cash by early 2024 and in the current environment raising more funds could be difficult. Especially, if its main financier so far (Thomvest) turns away. Thomvest expressed these arguments in the following way:

The availability of further capital to LMNL on attractive terms (or at all) is uncertain and significantly constrained by SALP’s status as controlling shareholder; In the absence of significant further capital being available to LMNL, it will be forced to consider a shut-down of its business operations with attendant risk and disruption to all its stakeholders.

Given this financial pressure as well as a material influence by the bidder over LMNL’s board, and a 100% offer premium to pre-announcement, it is hard to see how the special committee or minority shareholders could reject this buyout proposal.

I also think the risk of Thomvest walking away is low. While I am not entirely sure why Thomvest is pursuing this transaction, I believe it is mostly interested in LMNL’s cash, fully owned 150k sq ft manufacturing facility in Ontario, and NOLs. Current LMNL drug development programs are at a very early stage (pre-clinical) and might be of limited value. The buyout offer comes at a $23m price tag. This compares to $18m (C$24m) of net cash after liabilities as of Dec’22 and $461m of various NOLs (Canada’s federal/provincial and UK’s) expiring beyond 2030. There is also a manufacturing facility held on the books at C$2.6m with a cost basis of C$4.6m. There is very limited info about this manufacturing facility, only that it was received as part of the 2016 acquisition of Telesta. The market value of this facility might be materially higher as, for example, another one of LMNL’s facilities Labrosse (in Quebec) was previously sold materially above its carrying book value – for C$3.2m in net proceeds vs the previously recorded carrying amount of C$0.8m. Real Estate assets sold in 2021 also fetched prices above book value (C$13.6m vs C$10.8).

Also, unlikely to have any impact on the current merger, but there is an ongoing lawsuit against the company (filed on Mar’21) by its shareholders due to the refinancing transactions of 2019. It seems to have limited merit and the damages sought appear to be from a dream book – C$950m out of which C$905m of that based on the loss of future value of LMNL shares.