AMTI board: Time to terminate the CYTH merger
The merger with Cyclo Therapeutics has gone from mediocre to terrible, AMTI's value in liquidation is likely close to double the merger consideration.
Since the announcement of Applied Molecular Transport’s (AMTI) merger with Cyclo Therapeutics (CYTH) the market has clearly voted "no" to the deal. Cyclo stock has declined from a closing price of $1.60 the day prior to the announcement to $0.94 yesterday. That drops the value of the merger consideration from 27.8 cents per AMTI share to 16.4 cents, a 41% decline that I expect you find as sickening as I do. In the merger conditions, Cyclo requires AMTI shareholders to surrender 40 cents in net cash per AMTI share in return for now barely over 16 cents of CYTH stock, a 41% loss in a single month turning a questionable trade into an awful one.
To illustrate even more clearly how ridiculous this merger has become, CYTH is trading 7.6M shares for roughly $16M in net cash, essentially selling AMTI shareholders CYTH shares for $2.10 each, not just over 120% higher than current trading price but 120% higher than the exercise price they put on warrants to their own shareholders just yesterday.
Yes, now it got worse. Yesterday CYTH announced that they raised $2.1M by inducing holders of CYTH 71 cent warrants to exercise in exchange for 3.3M new warrants exercisable at 95 cents. It sure looks like selling pressure from these new shares accelerated CYTH’s recent price decline. But worse is that this significant dilution lowers AMTI shareholders ownership percentage by over 10%. That looks like a clear material violation of the warranty of CYTH’s capitalization in section 4.01 of the merger agreement, which if true would void any breakup fees owed from AMTI terminating the agreement.
This is the time to either walk away if CYTH will not significantly increase the merger consideration. I estimate that even if required to pay the maximum $1M breakup fee + expenses, that a straight liquidation of the company should return close to 30 cents per share to AMTI shareholders. To forego terminating the agreement for the clearly more attractive liquidation option, that to allow CYTH to retain the same 0.174 exchange ratio that CYTH should agree to adjust the net cash remaining requirement to $8M, allowing AMTI to pay shareholders a roughly 20 cents per share cash distribution before closing (preferably in a manner that can be treated as return of capital for tax reporting). Or if CYTH prefers to keep the net cash requirement the same, it should agree to double the exchange ratio to 0.348. Either change would still value CYTH shares at over $1/share, much closer to fair market value.
Any compromise less than the two I’ve outline makes our only viable option is to terminate and liquidate. I will not be voting for the merger under its current terms and urge other AMTI shareholders to vote against it as well.