Peel Hunt has downgraded Arix Bioscience (ARIX) from ‘buy’ to ‘hold’ in response to RTW Biotech Opportunities’ (RTW ) proposal to acquire its assets, which analyst Miles Dixon believes is ‘opportunist’ and undervalues the shares.

The all-equity transaction would see RTW issue 1.4663 shares for each Arix share to buy its rival’s assets, meaning shareholders will recieve 141m shares in RTW.

The agreed deal values Arix shares at 143p, a 46% premium to their closing price on 12 July, the day before the company announced it was undertaking a strategic review, but a 21% discount to the September net asset value (NAV) of 180p per share.

Arix’s largest shareholder, Starboard Value-backed Acacia Research, has been offered much better terms by RTW, who will buy their whole 25.5% stake for about £47.2m, securing 1.7 times its share of Arix’s cash per the most recent NAV, Dixon said.

‘Somehow Acacia Research has co-opted RTW to help it “crack the Arix safe”’, he added.

While NAV accretion and access to $60m in cash post-debt and fees were strong motivators for RTW, Peel Hunt was not sure what the motivation was for Arix shareholders.

RTW gains access to Arix’s £56m listed portfolio, £68m in unlisted assets and miscellaneous of £2.9m. In summary, that is $146m in illiquid equity for $213m in value, a discount of 31.5%, Dixon said. If the cash and listed equities are paid out in full, that sees RTW gain Arix’s unlisted portfolio for just 30 cents on the dollar, he added.

‘[We wonder] what alternatives Arix’s board was driven to consider, in order to see this deal as the “best outcome”,’ he wrote, in his capacity as Arix’s broker. ‘Regardless of what happens from here, the only certainty we see is that Acacia has its cash.’

He said shareholders of Arix are being stumped with illiquid shares and would take them 3.5 years to exit RTW based on the last 12 months trading volumes

‘Surely an orderly winding up could have been done faster and been fairer to all  shareholders,’ the analyst wrote as he downgraded Arix from buy to hold, and lowered the target price from 172p to 115p.

Dixon said if Arix share price, which is down 3.3% to trade at 113p on Thursday, is any indication, the deal may fail when Arix shareholders vote in the first quarter of 2024.

The AIM-listed investment company’s largest shareholders after Acacia include Fosun International Holdings, the Shanghai-based investment firm led by billionaire Guo Guangchang that owns Wolves Football Club, French pharmaceutical company Ipsen Pharma and Ruffer (RICA ), with respective stakes of 8.7%, 5.2% and 5%, according to Refinitiv.

Yesterday, RTW Investments managing director Woody Stileman said that among the key assets that RTW will acquire are a larger position in private UK cancer treatment specialist Artios, and Arix’s largest listed position, Disc Medicine, a US company that develops novel treatments for patients suffering from serious haematological diseases. 

Much of the capital will be deployed into depressed valuations as biotech endures the second worst bear market in its history. No more cash will be added to the ongoing $10m share buyback programme. The discount has widened from 21% to 33% since the announcement yesterday.