Playing BMY-MJN Tender

Discussion in 'Trading' started by livevol_ophir, Dec 15, 2009.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    Details on my blog here:

    First, here is the situation in plain English: If you own BMY (current price 25.68) shares, you can swap them for 0.6313 of MJN (current price 42.49) in a tender offer.

    The Opportunity
    Owners of BMY stock get 0.6313*$42.49 = $26.82 for each share of BMY tendered and converted into MJN. That BMY share as of present is worth $25.68. That's a $1.14 gain.

    Complication #1
    A maximum of 170 million shares of MJN can get created. That's 170M/0.6313 = ~270 million shares of BMY can be converted. There are 2 billion shares of BMY outstanding. If you take an extreme, where every single share of BMY stock is tendered, then ~13.5% (270M/2B) of shares will be converted.

    Complication #2
    All of the shares of BMY will almost certainly not get tendered. Why? Think of all the ETFs and Index funds that need to mirror their indices. They want their BMY and will not tender. There are several other scenarios.

    Complication #3
    MJN is hard to borrow - see below for details and implications.

    Let's start from zero position in either company. Clearly, the first step is to get long BMY shares if you care to tender. You can buy naked BMY and then sell MJN with the hope that you will collect that 1.14 above. But, only a small proportin of your BMY stock will turn in to MJN (some number > 13.5%). So what do you do with the other long stock? That's a delta risk.

    One Approach
    You can do a conversion in BMY to get long stock.
    Sell Calls
    Buy Puts
    Buy Stock

    That is delta neutral (selling synthetic stock and buying real stock 1-to-1). You can do that and pay 0.05 right now. Ok, so now you have no delta risk in BMY and you can tender all your shares. Right?

    But what about after tender? Your position will be:
    Short Calls
    Long Puts
    Long less stock (some is now MJN).

    So you have delta risk all of a sudden. Specifically, you are sort BMY delta (short synthetic stock and long real stock but now less than 1-to-1).

    Also, you are now long MJN stock - which of course can move.

    You could buy cheap puts in BMY to protect that downside. The puts are cheap enough that the hypothetical $1.14 spread is still a winner.

    But... what about MJN? You might end up shorter than you think or longer than you think depening on the actual percentage of tenders that are turned into stock.

    Second Approach
    Skip the BMY tender complication. You can reverse in MJN for a credit.
    Sell Puts
    Buy Calls
    Sell Stock

    That's buying synthetic stock and selling real stock 1-to1 so it's delta neutral. You can do this right now and receive 0.35.

    Since so many people are buying BMY and selling MJN, the number of shares available for borrow in MJN are reduced. The brokerages are forced to charge a large negative rate to people selling short (borrow stock and then selling it). As of right now, the short rate is low enough that this reversal is a big winner (depending on your broker ~0.20 winner).

    But... As MJN continues to get shorted - the rate to borrow it becomes more negative. It can go to -100% or even several times more. All of a sudden receiving 0.35 isn't enough to be short stock.

    If you think the possibilites out carefully there could be a play. But no matter how you look it at, it is definitely not a free $1.14.

    Details on my blog here:

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