I know this following post digresses from the strict "value" doctrine, but I also know there are some money managers who frequent the thread, who might be willing to tell us what "pros" think of this situation, and those who aren't pros might want to contribute their .02.
DuPont (DD) is offering to exchange one of its shares for 2.95 shares Conoco-B (which currently trades on a "when issued" basis), up to a maximum of 148 mil. DD shares. There are certain other conditions, one of which is a minimum of 74 mil. DD needing to be tendered. If this is oversubscribed, then shares of COC-B will be distributed on a pro rata basis. For instance, if you tender 200 shares, and 296 mil. DD shares are tendered, you will receive (200 X .5) X 2.95 COC-B shares. 100 DD shares would come back to you.
Coc-B WI currently trades at about 26, DD 71, so 2.95 X 26 = 76.7, there looks to be an arb opportunity here. How to take advantage of it? The only visible difference between the A & B is that B has 5 votes, A one.
1) Buy 500 DD, sell short 1475 COC (you can't short the COC-B WI), tender the DD, then cover the COC post Aug. 6, when the deal will be done, and sell the COC-B you will receive. Risks: B & A diverge significantly post tender, B lower than A (actually IMHO B should trade slightly higher than A because of 5-1 voting ratio). Another very real risk (almost assured IMHO) is oversubscription, whereby you will need to cover more shares than you are receiving. If COC goes up post tender, not good.
2) Buy COC-B WI, feeling that it will bridge the gap post tender.
3) Sell short DD for the reverse reason in 3). Unlikely because of shares out of DD IMHO.
Comments, thoughts, etc., I'm also going to try to find an arb thread on SI. |
