Presenting a live 90 ‐ minute webinar with interactive Q&A Contingent Value Rights: Contingent Value Rights: Bridging the Valuation Gap in M&A Deals Structuring Deals that Protect Buyers and Sellers, and Lessons Learned from Sanofi ‐ Genzyme THURS DAY, S EPTEMBER 8, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f Igor Kirman, Panel Chairman, Partner, Wachtell Lipton Rosen & Katz , New Y ork Robert Arsov, Director of Investment Banking Division, Credit Suisse , New Y ork Andrew W. Ment, Partner, Covington & Burling , New Y ork Attendees seeking CPE credit must listen to the audio over the telephone Attendees seeking CPE credit must listen to the audio over the telephone. Please refer to the instructions emailed to registrants for dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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CVRs: Bridging the Value Gap Igor Kirman, Program Chair, Wachtell Lipton Igor Kirman, Program Chair, Wachtell Lipton 212.403.1393 IKirman@wlrk.com Robert Arsov, Credit Suisse 212.538.7032 robert.arsov@credit-suisse.com Andrew Ment, Covington & Burling 212.841.1012 ament@co com ament@cov.com September 8, 2011 Covington & Burling Credit Suisse Wachtell Lipton
Table of Contents Table of Contents ◦ Overview of CVR Securities ◦ Sanofi-aventis/Genzyme Case Study 6 Covington & Burling Credit Suisse Wachtell Lipton
What are CVRs? What are CVRs? ◦ C ontingent ◦ V alue ◦ R ights g ◦ Sometimes also called “CPRs” (Contingent Payment Rights) ◦ R Represent an obligation of the issuer to pay additional consideration bli i f h i ddi i l id i upon specified trigger events 7 Covington & Burling Credit Suisse Wachtell Lipton
Price-Protection Vs Price Protection Vs. Event Driven Event-Driven ◦ Price-Protection CVRs • Essentially hedging instruments that guarantee/set a floor on securities used as consideration in transactions ◦ ◦ E Event-Driven CVRs t D i CVRs • Provide for payments linked to achievement of certain specified events or performance metrics p ◦ Can also conceptually divide CVRs into “Financial Performance- Based” and “Event-Based” 8 Covington & Burling Credit Suisse Wachtell Lipton
Price-Protection CVRs Price Protection CVRs ◦ Security that provides for a payment (either cash or securities) if the market price of acquiror’s stock is below a target price k t i f i ’ t k i b l t t i • Also often contains a “floor” capping the potential payout under CVR ◦ Example: CVR that provides for payment of the difference between market price of acquiror’s stock in one year and a “target price” of $50, with “floor” of $25 • If acquiror’s stock is at $30 in one year, CVR holders receive $20 ◦ As hedging instruments, trading value should move inversely to value of acquiror’s stock 9 Covington & Burling Credit Suisse Wachtell Lipton
Price-Protection CVRs Price Protection CVRs ◦ Several issues to consider • Form of consideration: cash versus stock ◦ If stock, consider method of valuation and need for registration/shareholder approval • Maturity Date M t it D t ◦ Option to extend maturity (extension typically carries increase in target price and “floor” price) ◦ Early redemption/termination of CVRs (in some cases, will terminate y p / C ( , automatically if acquiror’s stock exceeds threshold over defined period) • Ability of acquiror to repurchase ◦ For price-protection CVRs, repurchases typically prohibited, at least during valuation period l d • Covenants/events of default • Anti-dilution adjustments 10 Covington & Burling Credit Suisse Wachtell Lipton
Event-Driven CVRs Event Driven CVRs ◦ Payments can be triggered by a number of different trigger events or performance metrics: performance metrics: • Achievement of milestone events (hitting sales targets, receipt of FDA approval) • Financial metrics (EBITDA/revenue levels, net asset/working capital Financial metrics (EBITDA/re enue le els net asset/ orking capital levels) ◦ Functionally similar to earn-out • P Proceeds from some uncertain event (outcome of litigation, divestiture d f t i t ( t f liti ti di tit of assets, escrow release from indemnification) ◦ Particularly common in biotech/pharmaceutical transactions • Milestone payments are already commonly used by such companies as part of research collaborations or drug licensing agreements • Single drugs can have a huge impact on valuation of such companies 11 Covington & Burling Credit Suisse Wachtell Lipton
Event-Driven CVRs Event Driven CVRs ◦ Several key considerations: • Definition of triggering event ◦ If based on financial metrics, definition of EBITDA, net assets, working capital, etc.; if based on specific event, precise definition of event (for instance, receipt of defined FDA labeling approvals in certain jurisdictions) i i f d fi d FDA l b li l i i j i di i ) • If calculations are necessary, which party will perform ◦ Non-calculating party may have defined audit rights Non calculating party may have defined audit rights • Operating restrictions/support obligations for relevant business ◦ E.g. requirement that acquiror use commercially reasonable, reasonable or “diligent” efforts to achieve sales metrics “dili t” ff t t hi l t i • Reporting obligations ◦ May specify that acquiror’s reports disclose certain financial reports or May specify that acquiror s reports disclose certain financial reports or information on current status of litigation 12 Covington & Burling Credit Suisse Wachtell Lipton
Other CVR Considerations Other CVR Considerations ◦ Documentation of right • Payment rights can merely be described in acquisition agreement, or can be set forth in separate agreement or formal indenture with a trustee • Choice of form may influence enforcement rights of CVR holders • Choice of form may also depend on whether CVR agreement will be Trust Indenture Act qualified 13 Covington & Burling Credit Suisse Wachtell Lipton
Other CVR Considerations Other CVR Considerations ◦ Securities Act Registration: SEC employs a five-pronged test to determine if CVR issued as part of merger consideration is a determine if CVR issued as part of merger consideration is a “security” that must be registered under the Securities Act • CVRs are not required to be registered if: ◦ The CVR is an integral part of the merger consideration ◦ The CVR does not have rights common to stockholders (e.g. the right to vote or receive dividends) or otherwise represent an ownership interest in the buyer buyer ◦ The CVR does not guarantee a minimum payment or bear a stated rate of interest ◦ The CVR is non transferable and non assignable (except by operation of law) ◦ The CVR is non-transferable and non-assignable (except by operation of law) • Typically a key factor ◦ The CVR is not represented by any form of certificate or instrument 14 Covington & Burling Credit Suisse Wachtell Lipton
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