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Ralcorp Holdings, Inc. (Ralcorp) is engaged in manufacturing, distributing and marketing private-brand food products, Post brand ready-to-eat cereal products and other regional and value-brand food products in the grocery, mass merchandise, drugstore and foodservice channels.
This is a fascinating takeover story with a deadline fast approaching and billions on the line. I've taken some snippets from a Bloomberg article written by Tara Lachapelle and Jeffrey McCracken on 9-14-2011. You can read the full article here: Ralcorp Board Costing Investors $1 Billion in ConAgra Opposition: Real M&A
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Ralcorp plunged to $79.11 yesterday after ConAgra said it will withdraw the $94-a-share proposal if the cereal maker won’t start negotiations by Sept. 19. [...] While Ralcorp’s [...] goods may only be worth a combined $86 a share in an upcoming separation, ConAgra may be willing to pay $104 to secure a deal, said BMO Capital Markets.
[Congra...] is pushing for talks after St. Louis-based Ralcorp rejected its advances, adopted a poison pill and said splitting in two will “unlock significant value” for shareholders. ConAgra, which began its pursuit at $82 a share in March, is now valuing the biggest U.S. maker of store-brand foods at $7.3 billion including net debt. Ralcorp still fell 7.1 percent yesterday as traders who profit from mergers and acquisitions abandoned bets after pushing the stock as high as $90.51 in May.
“It’s put up or shut up time for Ralcorp,” Jack Russo, an analyst for Edward Jones & Co. in St. Louis, said in a telephone interview. “Clearly the board of directors at Ralcorp is under the gun. They may have to be more specific on how they’re going to take care of their own shareholders if they don’t accept an offer.”
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The article goes on to describe how shareholders have called the board and how the "deal isn't dead." further, the article reads: "ConAgra said it’s only interested in acquiring the entire company and will pursue other opportunities if Ralcorp refuses to negotiate."
And if that's not enough, try this: "If ConAgra wants to keep its investment-grade credit rating, it’s probably capped at offering $100 a share [...] Alexia Howard, an analyst for Sanford C. Bernstein & Co. in New York, wrote in a Sept. 12 note to clients [...] [RAH] is rated Baa2 by Moody’s Investors Service and BBB by Standard & Poor’s."
Whoa...
Let's take a look at the Charts Tab (6 months) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).
Check out the stock movements -- gaps up and down are common place. On the vol side we can see that the implied is now trading over the realized vol, but, yeah, for good reason -- Sep. 19 is fast approaching. You could potentially make an argument that Oct vol is too low... no? More on that when we get to the Options Tab.
Let's turn to the Skew Tab, below.
Two things really stand out to me: (1) The front month is super elevated with just 1.5 days to go in the expiration cycle. (2) The skews in the back are flat. Weird...
Finally, let's turn to the Options Tab.
Starting in Sep, the 75 strike puts are priced to 80 vol -- the one day puts are worth ~$0.40. The Sep 90 calls are priced to 130 vol with fair value of $0.20. Whoa...
Looking to Oct, the ATM straddle is worth $8.60, with the month priced to ~42 vol... 42 vol? Really? It feels like the option market reflects some ambiguity as to the finality of this Sep. 19 deadline. But, then again, the Dec options are priced to even lower vol than Oct.
Possible Trades to Analyze
I'll stay agnostic(ish) here... ok, no I won't... Selling that Oct vol feels... not as good as selling vol usually does... IMHO. But the again, I haven't been following this for more than, well, an hour.
This is trade analysis, not a recommendation.
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Im in those..
ReplyDeleteThe Octs 90 were priced at 51 iv just yersterday, with Dec 90 @42 iv. So maybe now its a bit too late to long those calendars..