It's been a little over a month since Globus Medical and NuVasive sent shockwaves through the spine market with news of a proposed merger – news that has not been well received by investors of either company.
The fate of this pending merger will come down to a NuVasive shareholder vote, the date of which has not yet been disclosed but is expected to happen sometime in the second quarter. If it goes through, the merger will create the second largest player in spine behind Medtronic.
For a while it seemed like NuVasive shareholders had little reason to approve the deal after shares of both companies dropped so dramatically, but the merger proxy statement contains some interesting revelations. The S-4 statement was filed with the U.S. Securities and Exchange Commission on March 10.
"After reviewing the proxy, we think [NuVasive] shareholders will begrudgingly vote in favor of the transaction but are likely unhappy with the realized value for [NuVasive] shares," Ryan Zimmerman, a medtech analyst at BTIG, wrote in a report Tuesday. "None of this should come as a surprise given how terrible shares of both companies have traded since the proposed merger was announced."
Zimmerman, who has covered both Globus and NuVasive (as well as the broader spine market) for about a decade, also highlighted 10 takeaways from the merger proxy.
NuVasive's internal financial projections fall below public targets
One of the most surprising takeaways from the merger proxy that Zimmerman called attention to is the fact that NuVasive's internal financial projections, disclosed to Globus as part of due diligence, don't match up with what management laid out at the company's 2022 analyst day. NuVasive had laid out five-year financial targets of $1.7 billion of core business revenue by 2027 and $2 billion inclusive of M&A, Zimmerman noted. However, according to the proxy statement, NuVasive's internal revenue projections are $1.54 billion by fiscal 2024.
"There was a second set of projections that [NuVasive] offered that more closely align with [NuVasive's] long-term goals, but we're still uncertain why [NuVasive] had internal projections that were below their public targets." Zimmerman wrote. "We would have thought that these would be higher to ensure that [NuVasive] can hit the targets it set out at its analyst day."
Internal projections at both companies were below analyst consensus
The merger proxy shows Globus Medical's internal projections to be below analyst expectations, and Zimmerman speculates that this may help explain why Globus was pursuing this transaction. The analyst explains that there are three key sets of revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization) expectations worth noting: the company's initial internal estimates, the company's revised internal estimates, and analyst consensus estimates. The respective CAGRs (compound annual growth rates) are 7.0%, 8.2%, and 9.5%. According to Zimmerman, consensus was well ahead of Globus Medical's projections even after the company revised its estimates.
"Our interpretation of this discrepancy between internal estimates and consensus estimates may be partly why [Globus] was pursuing this transaction," Zimmerman wrote. "That's not to say that [Globus] looked at consensus and pursued [NuVasive]. [Globus] has never had much interest in what the Street thinks about it (the result of its ownership structure and voting dynamics), but if the Street started to see slower growth from [Globus] (which was the case in 1H22, when growth slowed), then the premium that [Globus] shares held could have been put in jeopardy."
Zimmerman also noted that NuVasive's internal projections were "well below" analyst expectations, with the company projecting a CAGR of 5.1% through fiscal year 2027 compared to analyst expectations of 7.1%. This shouldn't come as a surprise to investors, the analyst said, because NuVasive's performance versus analyst expectations has been historically mixed.
Globus and NuVasive began talking back in 2021
The proxy statement confirms a 2021 rumor that Globus and NuVasive were in deal talks as far back as September 2021. In November, the speculated deal was reported by various media outlets (including MD+DI) and, according to the filing, "these reports led to stock price volatility, as well as disruption impacting the companies' respective employees and other stakeholders."
Given the "very early stages" of discussions, and the fact that no diligence information had been shared, Globus and NuVasive agreed that engaging in more substantive interactions would lead to further unwanted disruption at that time, and discussions ceased. The companies did exchange occasional communications from the end of November 2021 through early October 2022, including communications about industry trends and developments, as well as industry consolidation, "but no substantive discussions regarding a possible strategic transaction," according to the filing.
Globus Medical's initial consideration for NuVasive was 0.9 shares of Globus Class A stock, which at the time was $76.07, and NuVasive shares were trading at $58.03. Zimmerman said this would have equated to $68.46 for NuVasive shareholders.
"That looks like a pretty good offer now, and it begs the question: Is [Globus] willing to go higher if [NuVasive] shareholders vote 'no'?" Zimmerman wrote.
Deal talks resumed a year later
According to the filing, Globus and NuVasive officially resumed deal talks on Nov. 1, 2022. This time around, Globus offered 0.80 Globus Medical shares, which at the time was $66.92, and NuVasive shares were trading at $44.71. This equated to $53.54 for the acquisition.
"[Globus] has always been a shrewd buyer of assets, not chasing price and looking to pick up assets at a discount, so it doesn't come as a surprise to us that as [NuVasive] shares fell, so did [Globus Medical's] offer price," Zimmerman wrote in his report.
The merger proxy states that during the period between Nov. 1, 2022, and Nov. 15, 2022, the gap between the stock price of Globus Class A common stock and NuVasive common stock continued to widen, with Globus' stock climbing about 7.3% while NuVasive's stock fell about 16.6%
So, on Nov. 15, 2022, Globus lowered its offer price to 0.72 shares of Globus Medical, which at the time was $70.40, while NuVasive was trading at $36.42.
"At this point, even though [NuVasive] is said to have cut off discussions with [Globus] because the price was too low ... they continued to dialogue a few days later. To us, this reflects the weak negotiating position [NuVasive] truly was in," Zimmerman wrote.
In December 2022, Globus upped its offer to 0.75 shares, which equated to $53.72. At that time, NuVasive shares were trading at $40.38. The proxy statement indicates that the NuVasive board considered soliciting other offers from various third parties, but ultimately concluded that there was unlikely to be a third party who would be able or willing to make a better offer.
Zimmerman noted in his report that none of the other major strategic players in the spine market were able to bid on NuVasive, either because they were not interested or were financially tied up in other areas.
"Either way, there was not another offer coming," he wrote. "It doesn't surprise us to see it disclosed in the proxy."
So, maybe Globus Medical's current offer price isn't so bad after all
In February, the companies agreed on a merger proposal with an implied price for NuVasive shares of $57.72, which "given the history of interest from [Globus] and [NuVasive's] negotiating leverage (or lack thereof), doesn't seem to be that terrible of a price," Zimmerman wrote.