The unexpected move by the Milanese state’s attorney to block the merger between cardiology companies Sorin and Cyberonics has given the share price of the Italian group a bit of a knock, but will probably not actually derail the $2.7bn transaction.
It could delay it, however. The merger had been slated to close by the end of September and, depending on how Sorin responds, could be pushed into the fourth quarter or beyond. The companies say they will “vigorously” fight the claim, but a swift settlement might be a better idea if it means a more rapid close for the Cyberonics deal.
News of the blocking attempt caused Sorin’s shares to sink 12% in early trading today. They have since recovered slightly and are now down 3% to €2.69.
The claim, filed with the Civil Court of Milan on behalf of the Italian Ministry of the Environment and other public groups, alleges that Sorin pursued the deal as a way to shield itself from potential liability to pending litigation against its previous parent, the chemical company Snia. The Snia lawsuit dates from before Sorin was spun out in 2004 and concerns legal liability for clean-up activities at two sites, in Brescia and Torviscosa, which belonged to its former subsidiary Caffaro.
It is unclear how much Sorin could be on the hook for, but according to Jeffries analysts the figure was put at €60m for Snia in Sorin's 2004 IPO documentation. Sorin continues to contest the claims through the Italian courts.
Analysts from Berenberg wrote in a note this morning that “the Italian state’s attorney is less looking to scupper the transaction in its entirety, and rather [will] use it as a trigger to reach a quick cash settlement for a case that was otherwise likely to go on for many years”.
LivaNova a barrel
If so, this is a clever move. Sorin in particular needs the merger close, as its share price shift shows, and ought to be willing to accede to the state’s attorney’s demands.
The new company, to be called LivaNova, will have several advantages. Firstly it will be a larger, more diverse company in a sector where it is increasingly important to build scale and offer as wide a range of products as possible. There are also geographical synergies as Sorin gains most of its sales from Europe and Japan whereas Cyberonics is mostly US-based (Bigger is better for Sorin-Cyberonics combination, February 27, 2015).
Moreover, LivaNova will be based in the UK to take advantage of a lower corporate tax rate. The shares in the new company will be listed on both Nasdaq and the London stock exchange.
Sorin will surely be willing, if not happy, to sacrifice a few tens of millions of euros to keep the LivaNova transaction on – or just behind – schedule.