Wednesday, February 3, 2010

TLB - BPW Warrants

As if the TLB - BPW conversion isn't complicated enough, here's a little more to chew on. Keep in mind, the warrant details mat change - read the filings to see the details. I have NOT verified everything here - this is just how we see it on the floor and I can't find a single trader here that is certain about some of the minute details; I can find traders that are trading these warrants with the stock(s) (various sides).

First blog: HERE
Second blog: HERE

Yesterday Near Highs:

Yesterday Close:

Two warrants exist: BPW.WS (1.18 x 1.20), BPW.U (11.00 x 11.80)

BPW.WS is a 7.5 strike warrant that you can buy for 1.20. It is like European exercise - it can only be exercised if the deal goes through. You would buy one BPW share for 7.5 which is the net of paying 8.70. As long as TLB stays above $8.49.

Why 8.49? The target price for TLB conversion is 11.25. The number of shares of TLB that each BPW share turns into is in a range 0.90 - 1.325. So, assuming the worst case scenario (lowest TLB stock) you get 1.325 shares of TLB for each BPW ---> 11.25/1.325 = 8.49.

So at fist glance this is an easy arb. Buy the warrant for 1.20 --> deal goes through--> exercise your BPW for a total of 8.70 and sell it out @ 11.25 as long as TLB doesn't collapse from ~13 to below 8.49.

But that would imply that there is ~30% chance that the deal doesn't go through - otherwise the arb wouldn't be there anymore. But all signs point to this being more like a 90% event (or more). So what's happening?

Recall the difference between a warrant and an option. Specifcally, warrants issued by the company itself are dilutive. When the warrant issued by the company is exercised, the company issues new shares of stock, so the number of outstanding shares increases.

So the rub here is that there will be an increase in the number of shares of TLB and push it down far enough that buying for 8.70 + risk premium is not necessarily a good purchase. i.e. the market is saying that TLB will be 8.70 + risk premium.

I believe if TLB closes above 12.50 the conversion ratio is unknown; there seems to be conflicting info on this.

For completeness: BPW.U is the warrant + one share of BPW stock.

News (
-- Thanks to reader Peter Lawler for finding this oddity --
The transaction also contemplates that, following receipt of BPW stockholder approval, Talbots will undertake an exchange offer for existing BPW warrants held by public warrantholders. The exchange offer will provide that 50 percent of the BPW warrants held by public warrantholders will be exchanged for the equivalent of $1.125 per BPW warrant in Talbots common shares through a floating exchange ratio of between .09000 - .13235 Talbots shares per BPW warrant, based on the trading prices of Talbots common stock prior to the BPW stockholders meeting, that the balance of BPW warrants held by public warrantholders would be exchanged for new Talbots warrants with new terms, including a term of 5 years and a strike price set at a premium of 30 percent to the closing valuation of Talbots' common stock as determined under the merger agreement. The Sponsors and certain directors of BPW have agreed to exchange all of their warrants for Talbots common stock at the same floating exchange ratio of between .09000 - .13235 Talbots shares per BPW warrant.

I don't recall ever seeing something so unnecessarily complex before...

Legal Stuff:

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