Mayne Merger Arb Opportunity

I’ve been following the Mayne-Cosette takeover battle in Australia from the sidelines but decided to enter the trade with the recent court win on October 15. I’ll invest in the rare merger arbitrage play if I feel the odds are extremely in my favour but most of the time the spreads are too tight or too wide for valid reasons. It doesn’t help that the downside is typically greater than the upside in most situations too. However, in this case there’s currently an approximately 20% spread due to two main hurdles outstanding that should be cleared within the next few weeks I believe.

Background

Back in February Mayne Pharma (listed on the ASX) agreed to be acquired by Cosette Pharmaceuticals for $7.40 all cash or AUD$672 million. A lot has happened since then and I won’t rehash all the details but just a quick background.

Mayne is headquartered in Australia but a large portion of it’s business is US based with a focus on dermatology and women’s health products. Cosette is jointly owned by a PE firm and a private market investment firm. It operates in the same two segments as Mayne: dermatology and women’s health. Pretty logical for why their two businesses should merge: same lines of business that can take out duplicative costs and obtain synergies.

However, Cosette claimed a MAC (Material Adverse Change) in May on 3 separate grounds of the SID (Scheme Implementation Deed):

•  The recently reported poor Q3 trading update by Mayne back in April (covering from Jan. – March)

• The TMXD litigation against Mayne

• An FDA ‘Untitled Letter’

The success rate of entering into a merger and than claiming a MAC to get out of the merger is borderline nonexistent. Even during COVID companies were compelled to complete the acquisition after claiming a MAC. What happened between February when the merger was agreed and May when Cosette was trying to claim a MAC were the Trump tariffs and the Pharma Executive order out of the White House. Essentially, Cosette got cold feet and tried backing out of the deal claiming a MAC on some rather bogus items. It looks like they just tried throwing some stuff out there to see if anything stuck.

Just to touch on their 3 MAC claims: regarding the Q3 weakness issue, there was an out in the SID if the annualized EBITDA declined greater than AUD$10.8 million but it didn’t appear that this was the case here as their Q3 performance was only temporary in nature and didn’t meet the necessary threshold on an annual basis which most likely saved Mayne here. Cosette was conducting due diligence during the beginning of the year in this time frame, did they not see the issue then?

The TMXD litigation is for a small amount relative to the size of the company (just over AUD$10 million) and I believe it started back in 2022. This litigation should have been known when conducting due diligence and accounted for. A weak ground to claim a MAC and in fact, Mayne is now countersuing TMXD.

Mayne received an FDA ‘Untitled Letter’ regarding one of its products that basically just said they have to remove some marketing that can be misleading to consumers. It was resolved in early June. Another baseless claim.

 Where We Stand Today

While this was ongoing, Mayne sued Cosette to close the transaction and recently won. The stock trades around $6.17 for a decent spread and what I think is a high probability of closing. There are two last hurdles before the acquisition closes:

1) FIRB (Foreign Investment Review Board) Approval

FIRB is the governing body that scrutinizes Australian mergers from foreign investors and the threshold for when you need FIRB approval for non-sensitive sectors is $330 million.

Mayne has a manufacturing facility in Salisbury, Australia that provides contract manufacturing that employs 200 people. The Premier of South Australia wrote to FIRB asking them to block the deal in September because Cosette communicated to FIRB that they will be shutting the facility down if they completed the acquisition. This letter and attempt at using a politician to try and get out of a deal reminds me of when the French foreign minister requested LVMH that they should delay their Tiffany purchase (which ultimately closed).

Mayne has came back and said that Cosette is only saying they’ll shut down the plant in order to get out of the deal. They also say there is no business sense in shutting down the plant because it has a book value of just over $70m, the products aren’t heavily exposed to the US and it’s Australian segment has shown 7% revenue growth in the last year. Mayne also just spent $18m modernizing the plant.

The threat of just shutting down a plant with real value in the millions of dollars is illogical. It doesn’t make business sense to do so and is clearly a ploy to getting out of the deal. A plant that employs 200 people that is not tied to a critical or sensitive industry (defence, infrastructure, minerals, etc.) does not seem like there should be a logical reason for not giving an approval.

 The FIRB decision is expected by October 31 (aka sometime this week) and I believe they’ll see through what Cosette is doing here.

2) Potential Cosette appeal of the lawsuit

With the court coming out in favour of Mayne on October 15 there is a 28 day window that Cosette can appeal, which would bring us to November 12th. However, the merger outside date is November 20 and the second court hearing to approve the scheme is November 3, 2025. That’s a lot of dates there and if you noticed the appeal date of November 12th is just 8 days before the November 20th outside date. Which would mean the appeals court would have 8 days to make a decision. However, I believe the courts would expedite the hearing in order to render a decision prior to the outside date. Justice Black’s opinion was delivered only 3 days after the hearings were finished.

Position Sizing

Because they downside here (30% - 50%) is greater than the upside, taking a smaller position to mitigate an unforeseen risk or something out of left field is crucial no matter how high the probability of close is here. If there was no downside and a high probability of close than the sizing would be different but for me this is a low single digit percentage of capital.