Monday, December 12, 2011

Vulcan Materials (VMC) - Hostile MLM Bid Pops Stock and Vol; Option Market Reflects More Risk

VMC is trading $40.27, up 20.0% with IV30™ up 9.0%. The LIVEVOL® Pro Summary is below.


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Vulcan Materials Company (Vulcan) is a producer of construction aggregates, primarily crushed stone, sand, and gravel. Vulcan has 319 aggregates facilities. The Company is also a producer of asphalt mix and ready-mixed concrete, as well as a producer of cement in Florida.

The news pushing the stock and vol is a hostile takeover bid from MLM. Here's the news from

NEW YORK (TheStreet) - Martin Marietta Materials (MLM) said it would buy Vulcan Materials (VMC) for $4.6 billion, creating a combined the construction materials and asphalt giant with an enterprise value of $11.4 billion.

In the all-stock share offer, Vulcan will tender its shares at a ratio of 0.5 of each Martin Marietta share, in spite of recording nearly double its competitors $1.8 billion in annual sales. The combination values Vulcan at $36.69 a share, a 15% premium to the average closing price of its shares in the last 10-days. On news of the deal, Vulcan shares raced past the offer price to over $40 a share.
Source:Martin Marietta Bids Half Shares for Vulcan's Double Sales, written by Antoine Gara.

Let's start with the Livevol® Pro Summary for MLM, below.

Based on that $77.05 print in the spot for MLM, if the deal was a certainty, VMC would be priced at $38.525 and the IV30™ for VMC would be 41.88. The elevated VMC stock price reflects a non-trivial possibility that the bid goes higher (either from this suitor or another). The elevated vol to the downside (see skew chart below) reflects the non-trivial possibility that the deal falls apart in some way.

Let's start with the Skew Tab for VMC and then below that, for MLM.

The puts in VMC that are 10% OTM (36 strike) are priced to ~75 vol. Those same puts in MLM (10% OTM = $70 strike) are priced to ~59 vol. This vol diff reflects the risk that the deal doesn't happen. The same analysis to the upside reveals ~68 vol in VMC and in MLM we're looking at no bid. The last bid OTM calls in MLM are the 80 strike priced at ~50 vol. This reflects the possibility of a higher bid either from MLM or another suitor or simply that VMC stock moves higher on its own.

Let's look to the VMC 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).

In VMC we can see the stock pop today, which actually reached as high as $45.00. On the vol side we can see the IV30™ pop today in VMC which is due both to the vol in MLM and the other "stuff" mentioned above.

The stock pop in MLM is a nice result -- the combined entity and price paid for it given the current bid is perceived as a value creator for the MLM entity and thus MLM shareholders. Having said that, that may mean a higher price is still "palatable" for MLM and could be a demand made by VMC stakeholders - board, shareholders, etc. Or, ya know, not...

This is trade analysis, not a recommendation.

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