Wednesday, February 1, 2012

Georgia Gulf (GGC) - Equity Markets Reflected Higher Takeover Bid; Now Option and Equity Markets Don't

GGC is trading $35.18, up small with IV30™ up substantially by 93.7%. The LIVEVOL® Pro Summary is below.


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Georgia Gulf Corporation is a manufacturer and international marketer of two integrated chemical product lines, chlorovinyls and aromatics. The Company’s primary chlorovinyls products are chlorine, caustic soda, vinyl chloride monomer (VCM), vinyl resins and vinyl compounds, and its aromatics products are cumene, phenol and acetone.

This one is all about a hostile bid, rejections of that bid, upped bids and then a rejection of that as well... with a caveat... I've included a timeline with news snippets and links, below:

Westlake Chemical Makes Unsolicited $1.03 Billion Offer [$30 / share] for Georgia Gulf
Source: Bloomberg via Yahoo! Finance

Georgia Gulf Rejects Unsolicited Proposal from Westlake Chemical
Source: BusniessWire via Yahoo! Finance

Westlake Chemical increased offer for Georgia Gulf to $35 per share, CNBC says
Source: via Yahoo! Finance

Georgia Gulf rejects higher buyout offer from Westlake Chemical
Source: Atlanta Business Chronicle via Yahoo! Finance

And the caveat...
Georgia Gulf Says It’s Open to Talks With Westlake
Source: Bloomberg via Yahoo! Finance

There you go. A $30 bid and rejection. A $35 bid, and rejection, but... A consideration to play nice. Or, in English, "how about a little more, eh?"

Let's look to 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).

In the stock portion we can see the awesome pop on the original takeover news. The stock closed at $32.93, while the bid was $30 / share. So the equity market reflected the potential for a higher bid -- that reflection proved to be correct. On that same day, the IV30™ dropped significantly from 54.51% to 38.72%. As the quiet period of speculation and waiting went on, the IV30™ dropped all the way to 21.92%. And then, there was today...

IV30™ has spiked to 42.45% (as of this writing), or a 93.7% increase. It's very "interesting" how GGC stock moved from $18.57 on 12-28-2012 to $24.48 on 1-12-2012. That's a 31.8% pop in two weeks (ish) before any news. That "kinda" means that the takeover bid for $30 / share perhaps shouldn't be compared to the $24.48 closing price pre-bid, but really the ~$18.50 level before the, ummm, the... "rumor." So maybe it's not a 23% premium, but really a 62% premium. In any case, $35 / share is the new bid. Using those same two starting prices, it's a 43% or 89% premium. So, yeah, GGC management is "Open to Talks With Westlake." Duh...

Let's turn to the Skew Tab.

We can see the upside bend to the Feb options, while Mar and May are more normal shaped. Said another way, in the very near-term, the risk reflected by the options is two-sided -- a higher bid or a deal that falls apart. But, looking out further, the risk reflected is more of a failed bid / takeover, than a higher bid. In English, the options market reflects that if a higher bid is coming, it'll have to come soon. Another interesting point is that while the underlying is still trading above the new takeover bid, it's just by a little (as opposed to over $2 on news of the $30 bid). Tricky...

Finally, let's turn to the Options Tab.

Recalling that this was an ~$18.50 stock before the news, the downside skew seems kinda, um, not scared.

This is trade analysis, not a recommendation.

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