In an all-stock deal, the tech insurance company Lemonade (LMND 1.53%) will soon acquire the pay-per-mile car insurance company Metromile (MILE). CEOs of both companies recently reiterated expectations that the deal will close by the end of the second quarter, meaning between now and June 30. Here's what you need to know about the acquisition and what it means for Lemonade's future.
The details of the acquisition
In November 2021, Lemonade announced its intention to acquire Metromile in an all-stock deal valued at approximately $500 million. Since the announcement, both Lemonade and Metromile shares have dropped about 70%. As a result of the decline in Metromile's stock price, the acquisition is now closer to $115 million, or roughly $35 million when accounting for Metromile's net cash.
Holders of Metromile common stock will receive one share of Lemonade for every 19 shares of Metromile. In all-stock acquisitions like this, cash will be paid in lieu of any fractional shares, meaning Lemonade will compensate any leftover shares not divisible by 19 in the form of cash within 10 business days of the transaction.
Metromile has another ticker, MILEW, which is for Metromile stock warrants -- the right (but not the obligation) for investors to buy the underlying stock from the company at a set strike price before the expiration date. The strike price -- an agreed-upon price at which a warrant holder may buy a specific security -- for MILEW is $11.50 and is set to expire on Feb. 9, 2026. At the time of the merger, Lemonade will assume the Metromile warrants and automatically convert them into a warrant denominated in shares of Lemonade common stock on the same terms and conditions, meaning the new strike price would be $218.50.
The deal still needs to clear one last hurdle: the approval from Delaware insurance regulators, since Metromile is incorporated there. Once that happens, all the deal's conditions will be satisfied, and the acquisition will close.
Merger arbitrage
At the time of this writing, Lemonade stock traded at $17.88 per share, and Metromile stock traded at $0.88 per share, creating a merger arbitrage -- the difference between a stock's trading price and buyout price -- of about 7%. That means if you were to buy Metromile stock today, and the transaction closes as planned, you would see immediate gains of 7%, assuming Lemonade's stock stays at the same price or increases.
Is Lemonade stock a buy today?
It's been an agonizing 12 months for Lemonade shareholders, with its stock down over 80% during that time. With the Metromile acquisition, Lemonade plans to expand its car insurance business, Lemonade Car, which currently operates in Illinois and Tennessee. And while Metromile operates in just eight states, the company has licenses in 49 states, allowing Lemonade to scale its car insurance nationally.
Whether or not Lemonade Car will turn things around for the struggling tech insurance company is yet to be determined. Management believes that with Metromile's data, Lemonade will incur less risk in who the company insures and therefore be more profitable. Still, it will take 18 months, management says, before Lemonade "will reap the fruits in the form of a larger, more efficient, more differentiated, and less risky Lemonade Car business."
Look for the Metromile acquisition to close any day now and for Lemonade to start rolling out Lemonade Car nationally over the next 18 months. You can monitor Lemonade's upcoming earnings reports and press releases to see how its car insurance product will play out and if the stock has a chance to rebound from its lows.
Still, any investor interested in Lemonade might want alternatively to consider buying Metromile stock due to the merger arbitrage and optimism from both CEOs that the deal will close soon.
