Project Description

Danaher Exchange Offer – Special Situation

November 15, 2019

DHR: $141.43

Market Cap: $101.6N

Enterprise Value: $103.4BN

NVST: $27.20

Market Cap: $4.3BN

Enterprise Value: $5.8BN

Exchange Offer

Danaher (DHR) announced this morning that it will proceed with an exchange offer for shareholders who want to swap their DHR shares for Envista (NVST) shares. NVST is a recent spin-off/partial IPO of Danaher’s dental products division.

To incentivize the exchange, Danaher will allow shareholders to exchange their stock for Envista common stock at a 7% discount. This is very similar to the Elanco/LLY share exchange that we took advantage of earlier this year.

I expect this exchange to be oversubscribed and substantially pro-rated. However, there is a provision in the exchange that odd lot shareholders (owning fewer than 100 shares) will not be subject to proration.

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How to Execute the Trade

DHR is currently trading at $141.43 per share. NVST is currently trading at $27.20 per share.

Here’s how the math works at current price levels.

Step 1

Buy 99 shares of DHR for $141.43 per share. Total cost of $14,002.

Step 2

Per the exchange offer, shareholders who elect to exchange their DHR shares will receive NVST shares at a 7% discount or at a price of $25.30 ($27.20 x (1-7%)).

$14,002 / $25.20 = 553.51 shares of NVST

553.51 shares of NVST / 99 shares of DHR = 5.5910. However 5.5910 is higher than the max exchange ratio of 5.5784.

Therefore, shareholders will receive 5.5784 x 99 share of DHR = 552.3 shares of NVST.

552.3 share of NVST x $27.20 = $15,022 of proceeds.

Step 3

Sell NVST shares that are received.

This works out to profit of ~$1,020 and the good news is most brokerage firms don’t charge commissions anymore! Schwab (my broker) will charge me $39 to execute the exchange. So my expected net profit decreases to $981. Still very good for a low risk/month long investment.

The share exchange is scheduled to expire on December 13, 2019 at the end of the day. Investors can withdraw their tendered shares at any time prior to the expiration date (December 13, 2019 unless DHR changes it).

To tender your shares, just call your broker (after you’ve bought the DHR shares) and inform them that you would like to tender your shares.

What are the risks?

DHR Sells Off

If you buy DHR and it sells off prior to the exchange, you could lose money on DHR. I’m not particularly worried about this risk, as investors have been bidding DHR shares up to take advantage of the share exchange.

However, if DHR does sell off, it would have to sell off by over 7.3% for you to lose money.

The Exchange Is Cancelled

The two conditions for the share exchange to proceed are as follows:

  1. At least 38.36MM shares of Envista need to be distributed in exchange for shares of DHR stock. DHR currently owns 127.87MM shares of NVST. Judging from the appreciation in DHR stock since the exchange announcement was made, I would expect the exchange offer to be oversubscribed. The ZTS/PFE exchange offer was ~4x oversubscribed as only ~24% of shares that were tendered were accepted. The LLY/ELAN share exchange was highly oversubscribed as well.
  2. The receipt of an opinion of counsel that the exchange offer will qualify for tax-free treatment to Danaher. I’m 99.9% certain that DHR has already received assurances from counsel that it will qualify as tax free. However, counsel cannot give its official blessing until the transaction is complete. I’m not worried about this risk.

Envista Stock is Weak After the Share Exchange Closes

If the share exchange closes and investors who’ve exchanged their DHR shares for NVST shares make 7.3%, but then NVST shares immediately depreciate by more than 7.3%, this trade will lose money. However, you could short the number of NVST shares that you expect to receive to lock in your profit.

Disclosure

Rich Howe, owner of Stock Spin-off Investing (“SSOI”), currently is long DHR. All expressions of opinion are subject to change without notice. This article is provided for informational purposes. Please do your own due diligence and consult with an investment adviser before buying or selling any stock mentioned on www.stockspinoffinvesting.com.