Here is the scoop-
The deal will close in the third quarter of 1998. At that time, each GNT share will be valued at .9165 shares of CNC. If CNC is worth $10 at that time, GNT shareholders will receive $9.17 for their shares. Conversely, if CNC is worth $100 at that time, GNT will be worth $91.17. As such, the option for CNC to buy GNT shares at $52.93 is a safeguard for CNC - it prevents them from paying more than what they valued the deal for (at least on 20% of the stock). In other words, if CNC for some reason took off, and traded up to $100 the day the deal closes, this provision would enable them to only pay $52.93 for 20% of GNT shares, and $100*.9165=$91.65 for the other 80%.
The price as of 4/6 is a reference point, nothing more; it represents the value of the deal at that moment. The actual value won't be known until the deal closes, and that is many months away.
The current disparity or gap in prices is do to uncertainty about GNT's accounting and whether or not this deal will truly be accretive for CNC. Also, as evidenced in Moody's reaction, this deal takes CNC into a higher risk business, the value of which is predicated on significant cross-selling. As such, this gap reflects uncertainty and will slowly close as the close date approaches or as more information becomes public.
Large institutional risk arbitrage departments typically close this gap by buying stock in the target (thereby driving up its price) and selling stock in the acquirer (thereby providing a hedge against general market exposure). They profit as the spread closes. When the Street is uncomfortable with a deal, they will often do reverse arbitrage by selling shares in the target (GNT) and buying shares in acquirer (CNC). If this deal breaks up, GNT will drop like a rock - a friend of mine who works in an institutional risk arb. department guessed to around $15 (why? because the deal would likely break-up based on accounting issues. This would be the third such infraction for GNT and we all saw what happened the last time. It would be much worse this time).
I am long GNT but I suggest anyone holding shares consider buying the Jan 30 puts in equal proportion to the shares you own (i.e. 1000 shares, 10 contracts). If the deal goes through, it was cheap insurance. If the deal breaks up, and the stock goes to $15, these options will be worth at least $15. Given their current price at $1.50, that would result in a profit of $13.50 per contract.
Good luck to all. |
