BHP Billiton has extended its $130/share offer for POT by a month to November 18th.
Marius Kloppers, CEO of BHP, said, "We have no plans to change what is currently the only offer on the table. I've seen a lot of speculation and rumors but the reality is there is only one cash bid on the table and that's ours at the moment."
Brad Wall, Premier of Saskatchewan, said, "As of today, I don't see how Saskatchewan is better with this deal, or frankly a subsequent deal."
With Canada showing signs of protectionism re: a takeover by an Australian firm, I believe it will be even less likely that we will see a rival bid by a Chinese consortium. If Brad Wall is resisting Aussie encroachment, then he would certainly do the same (if not with stronger language) should a Chinese consortium bid for POT.
Meanwhile, Chinese trade officials have suggested that they would move to block BHP's takeover of POT based on competitive concerns. All-in-all, BHP's bid doesn't look like it will be successful in convincing shareholders, management, or the Canadian government to sell.
While the work of handicapping M&A situations is always fraught with peril, I've gone long December $135 puts below $5 (last trade at 4.90).
Should the $130 deal be accepted on or before 11/18/10, then the downside is zero.
If the $130 deal is not accepted, then POT trades based on fundamentals (no M&A premium) which suggest a level that is likely to be considerably below $130 (was approx $110 prior to deal announcement, although overall market was lower then than it is today.)
Only chance for a loss is if the offer is extended further in 2011 or a rival bidder emerges. I do not believe either of these will occur. If an extension is your concern, I'd look to longer dated options (although this increases your loss potential if the $130 bid is accepted.) Because there are several unknowns here, this is a speculative position and should not constitute more than a percentage point or two of your overall portfolio (in my humble opinion.)
This is not a recommendation to buy or sell any security. Just something that may be worth taking a long look at...
Quotes and update provided by Reuters. (http://www.reuters.com/article/idUSTRE68J4VG20100921)
As I told you, as a former bull on POT, I think this is a well conceived trade. I would think that after deal was tabled risk arbs would have bid up the implied vol on OTM puts to protect themselves, but because the stock went so bananas, you could actually fade the deal at a strike above the offer price! Essentially, you're betting on no better deal emerging, which is a low probability event, with possible upside if the BHP bid gets rejected.
ReplyDeleteMy previously stated opinion that the spot price of grain has something to do with POT's runup is not being talked about much. Still this is a solid correlation:
http://finance.yahoo.com/echarts?s=^DJUBWHTR+Interactive#chart4:symbol=^djubwhtr;range=1y;compare=pot;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Absent the bid you might expect POT around 112 given the observed relationship. But, as the Economist observes, cereal supplies at least are solid globally and much of the rise is due to temporary hoarding by net importers after the Russian export ban.
http://www.economist.com/node/16994407?story_id=16994407
The market is in contango, as export bans are weighed in other countries, but stocks are far above what they were in 2007-2008, and the idea that high prices will lead directly to more planting and more marginal fertilizer demand is an untested one.
Great blog, Mr. Nordwand.