European Commission Orders Illumina to Unwind GRAIL Acquisition; Deal Will Unlock Near-Term Accretion but Valuation a Concern
The European Commission has officially enforced restorative measures against Illumina, requiring the reversal of its completed acquisition of GRAIL. This action follows the Commission’s earlier decision to prohibit the merger and the subsequent implementation of the acquisition by both companies.
In September 2022, the European Commission prohibited Illumina’s acquisition of GRAIL, expressing concerns that the merger would stifle innovation and reduce options in the emerging market for blood-based early cancer detection tests. Illumina and GRAIL executed the merger during the Commission’s in-depth investigation, in violation of EU merger control rules, leading to a fine for both companies in July 2023.
To rectify the situation, the Commission has ordered Illumina to divest GRAIL and restore the status quo to before the merger’s completion. The divestment measures must adhere to specific principles, including restoring GRAIL’s independence from Illumina, ensuring GRAIL remains competitive after the divestment, and executing the divestment promptly and definitively.
Non-compliance with these restorative measures could result in periodic penalty payments of up to 5% of the company’s average daily aggregate turnover, according to Article 15 of the EU Merger Regulation. In addition, companies failing to comply can face fines of up to 10% of their annual worldwide turnover under Article 14 of the EU Merger Regulation.
In a presentation made available to shareholders on October 11th, Illumina announced it would sell GRAIL if ordered to by either the European Commission or U.S. Federal Trade Commission. Given GRAIL’s current significant operating losses, the deal will be accretive in the near-term to shareholders. However, given the forced sale and significant contraction in valuations since Illumina announced the $7.1 billion deal, it is likely Illumina will take a significant financial loss. GRAIL recently reported data from a major clinical study, and has had some minor positive payer decisions, but is still in the very early stages of commercialization. Even for a large acquirer, the deal would be significantly dilutive in the near term.