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Keryx: Analyzing The Baupost Transaction

Summary

Seth Klarman's Baupost provides fresh cash to Keryx.

The transaction resembles some of Warren Buffett's special deals as the transaction itself improves its chances of success.

We will see what the move means for shorts and longs.

Today, Keryx (NASDAQ:KERX) announced a cash infusion from its largest shareholder, Seth Klarman's Baupost Group:

Keryx Biopharmaceuticals, Inc. […] today announced that it has entered into an agreement to raise $125 million through the private placement of Convertible Senior Notes (the "Notes"), due 2020, with funds managed by The Baupost Group, L.L.C. With the additional capital, Keryx has a pro-forma cash position of approximately $225 million as of September 30, 2015.

Most importantly, the company also announced the following:

In conjunction with the financing, Keryx will increase the number of directors on its Board to eight, as Baupost will have the right to appoint a director to Keryx's Board by the end of 2015. Baupost will also appoint an observer to Keryx's board.

The company also announced the implementation of a cost reduction plan to re-align its operating expense structure. The plan is expected to significantly decrease the company's cash operating expenses, excluding cost of goods sold, in 2016 to between $87 million and $92 million. Keryx plans to provide further 2016 financial guidance in early 2016.

So what should we make of this and what does it mean for the stock?

If the stock stays where it was yesterday, until 2020 Baupost will not earn a dime on its investment and simply get back either $125 million (cash settlement) or 33.42 million shares worth the same amount of money. While this could represent a substantial dilution of about 30%, it is nothing Keryx's shareholders should fear now. In fact, if the stock stalls until 2020, the company will likely have other, much more worrisome problems. In this respect, Baupost's investment represents a clear vote of confidence. In fact, as the fund does not get any interest payments, for the next 4 years, it will not make any money from its investment, if the stock does not go up. On the other...


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