Shares of iRobot(NASDAQ: IRBT) fell 11.6% in July, according to data from S&P Global Market Intelligence. Amazon(NASDAQ: AMZN) is trying to acquire the maker of Roomba robotic vacuum cleaners and other household robots. Nearly one year after the original merger announcement, the parties modified the deal's terms in order to reflect changes to iRobot's business value.
The rewritten acquisition papers lowered the buyout price from $61 to $51.75 per share. The same day, iRobot opened a $200 million financing facility in the form of a senior secured term loan from Carlyle Group. Amazon expects the lower buyout price to balance out iRobot's increased debt.
In a news release, CEO Colin Angle said: "iRobot is taking on new financing that we believe is sufficient to support our operations in a hyper competitive environment and meet our liquidity needs as well as pay off iRobot's existing debt. This new financing is the outcome of a thorough process and represents the best terms reasonably obtainable on additional financing to support our operations."
The companies are fighting to finish the all-cash merger, which has been facing regulatory challenges since its launch in early August 2022. The progress hit another setback as European regulators doubled down on their review in July. The final verdict is now due no later than Dec. 13, pushed back by one month at the companies' request. Amazon and iRobot needed more time to rebut the European Commission's anticompetitive concerns.
And iRobot investors don't seem terribly enthusiastic about the Amazon deal anymore. The stock currently trades at $39, far below the revised buyout price. If you expect the merger to overcome its challenges and close at the currently agreed price, you could pocket a 33% return from iRobot shares bought at today's lower prices.
This merger arbitrage play looks risky, though. The requested delay suggests that Amazon and iRobot have a hard time finding arguments against the European Commission's concerns, which could scuttle the whole affair.
If the deal falls through, iRobot would be entitled to a $94 million termination fee as the two companies part ways. That's about equal to iRobot's negative free cash flow over the last year. If you're thinking about taking advantage of this potential outcome (some would call it "probable"), you should also consider iRobot's consistently shrinking top-line sales.
The company might very well need the support of Amazon's deep pockets in order to pull off a sustainable turnaround at this point. iRobot's future as a stand-alone business looks murky at best.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com and iRobot. The Motley Fool has a disclosure policy.