BCE put options tell a story
BCE Takeover Part 31
Sincere apologies to those readers who could care less about the BCE (BCE:TSX) takeover saga, but with a $50 billion price tag, at least try to fein some interest. Or troll elsewhere in the blogosphere.
If you wanted to hedge out some of the deal risk associated with the OTPPB / BCE takeover, you would be asked to pay $4.55 to buy $40 June puts. If the stock was trading below $40 on the third Friday in June, you could sell your BCE at $40 and run; the only problem is that you’d be netting just $35.45 per for your 100 BCE shares (assume no commish on any trades) once you factor in the cost of the puts. $35.35 is well below the $37.96 that you could exit at today.
Naturally, if the BCE going private appears as though it will close by the time that week comes around, the stock might be trading above $41 by then…so you’d watch the put expire worthless. If the deal actually closed at $42.75 in June, you’d get that number, less the $4.55 cost of the expired option contract: you’d net $38.20, barely above where you could sell the stock today.
Let’s look at it a different way. If we accept that $42.75 is still the clearing price, and $28 is the price the stock will settle out if the deal falls apart, with a $37.96 quote right now, the market is telling us that there is a 67.5% chance the deal will close at the original offer price ($4.79 upside and $9.96 downside).
I know that the banks are rallying this week, but if Royal Bank of Scotland is considering a rights offering to bolster its balance sheet, and CitiGroup just wrote off another $17 billion, the backdrop for new mega-LBO loans hasn’t improved. Neverthess, BCE shares are up over $2 in the space of two weeks.
What do good earnings out of Google have to do with the Canadian telco buyout world? More likely, BCE shares are up given the positive outcomes with the CRTC, Industry Canada, and a better tone to the S&P 500. None of which were 1) ever in doubt, or 2) have any direct relevance to the BCE lending syndicate’s desire to close the deal.
Having just received the quarterly BCE dividend, perhaps it’s time for us junior arbs to move on. To stick it out, you have to believe the odds of the deal closing in eight weeks at $42.75 are better than 2-1. That’s not an easy call to make, given the lack of any BCE rumours whatsoever (see prior post “Are the lawyers turning BCE documents?” Aptil 18-08), the collapse of the Clear Channel deal (CCU:NYSE), and the ongoing troubles with many of OTPPB’s would-be lead lenders.
If arbing is your flavour, RIM’s up $30 in a month; why not pile in there? Or you can wait until the worry-wart hedgies drive BCE back down below $36, where the risk/reward profile is more appealing than today.
(disclosure – I own RIM)
An alternate trade for the puts would be a write transaction. The Jun 40 last traded at 3.75 impying a purchase price of 36.25 if you are exercised against. Assuming the deal closes as origianlly priced, you walk away with the premium in two months in exchange for tying up a little margin. If the deal gets renegotiated and closes around 38.00 which is what the market seems to be telling us, you still pocket 1.75. The risk is the deal falling apart altogether. The problem here is that the MX is not quoting any other June strikes, otherwise you could buy the 35’s as downside protection. All in all, a good trade if you think the deal will get done.
My broker told me the exchange pulled all of the calls a short while ago; no one can use this traditional method to earn premium and protect themselves.
We are just left with outrageous premiums on puts, but no juicy premiums on calls.
As they say in Vegas, it’s always better to be the house than the player.
Hey Mark…Thanks for the reply. It was actually the puts I was looking at. If you think the deal will get done for north of 36.25, being short the June 40 puts is a winner.