Tuesday, June 5, 2012

Hertz Global Holdings (HTZ) - Takeover Rumors Push Vol and Calendar Diff; Option Market Reflects Likelihood

--- OVERVIEW ---
HTZ is trading $11.95, down small with IV30™ down 0.4%. The Livevol® Pro Summary is included below.


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Hertz Global Holdings, Inc. (Hertz Holdings) is a holding company. The Hertz Corporation (Hertz) is its operating company and a direct wholly owned subsidiary of Hertz Investors, Inc., which is wholly owned by Hertz Holdings. The Company owns airport general use car rental brand.

This is a vol note surrounding an epic takeover battle that once settled may see a company that was once bid for $2 actually selling for closer to $90. Let’s look at some news snippets to familiarize ourselves with the story, then look at the vol ‘n stuff ‘n stuff.

--- ANALYSIS ---
Here are some snippets from a Reuters article published on 5-25-2012. While I’m hitting the highlights, a full read is likely in order – it’s very well done.

May 25 (Reuters) - Car rental company Hertz Global Holdings Inc is nearing its long-cherished goal of buying out rival Dollar Thrifty, after doggedly pursuing its quarry through a bidding war with rival Avis Budget for several years.

Hertz said earlier this month that it was close to getting antitrust approval - seen as the biggest hurdle to a transaction - having identified a buyer for the assets it needs to divest.


"This story has been there for a real long time and it is starting to suffer from deal fatigue," said Craig Effron, managing partner at Scoggin Capital Management. Scoggin holds shares of Hertz and Dollar Thrifty.

"Both the parties know what the deal price is going to be at this point. They are just waiting for the FTC to make their decision," he said.


Hertz and Avis have made several offers for Dollar Thrifty in the last five years. At one point during the financial crisis, Hertz offered to buy the smaller rival for $2 per share.

When Dollar Thrifty halted the sale process in October 2011, Hertz's offer was valued at $66.21 per share.

Dollar Thrifty's stock has since gone up about 30 percent. It was trading at $76.76 on Friday.

"We and most other shareholders will not agree to any transaction that has a 7 in front of it. Low 80s would not do the trick either," Westchester Capital's Behren said.

Source: Reuters via Yahoo! Finance; Is Hertz close to driving away with Dollar Thrifty?, written by A. Ananthalakshmi and Megha Mandavia.

They keys here are several-fold:
1. Timing – While the bid seems to be expected soon, it also seems like the FTC approval could push this after June expiry.

2. Effect – What happens to HTZ stock and vol if the bid does come out and is accepted… What if it’s not accepted? What if the FTC ends the fun before it even starts?

3. Likelihood – A quick and dirty way to observe the likelihood of a bid is actually easy – just look at DTG’s (the target) vol. Conveniently, I’ve got that image below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Looking at the vol, we can see that the implied is elevated to both of the historical realized measures, but look at the actual value. IV30™ is just 37%. The 52 wk range in IV30™ for DTG is [17.57%, 77.23%], putting the current value in the 32nd percentile. The option market is not reflecting a high likelihood of a big event when comparing the current vol to the past year.

With respect to stock price, the 52 wk range is [$50.94, $83.88] with the stock trading $77.48 as of this writing.

With all of that in mind, let’s turn to HTZ and the Charts Tab (6 months). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can see an abrupt drop in price. Even more interesting is the stock move off of earnings which saw an intraday rise, but ultimately a lower close. Since the earnings report, HTZ has dropped from $15.66 to $11.95 as of this writing. That’s a 24% drop in just over a month. While it’s not entirely clear what’s causing the downturn (other than a dropping overall market), it’s reasonable to guess that a part of the drop can be attributed to this takeover bid news. In English, HTZ stock may be going down in anticipation of the bid it will make for DTG. This may answer the “effect” question raised above.

On the vol side, we can see how HTZ implied dipped after earnings (as expected), but since then has exploded upward from 38.12% (5-4-2012) to now over 69%. That’s an 82% rise in a month. The 52 wk range in IV30™ for HTZ is [36.64%, 92.54%], putting the current level in the 61st percentile. The vol rise is in part due to the stock drop… So the question is, do you think the stock drop is due in part to the potential (or impending) bid? Quite convoluted…

Let’s turn to the Skew Tab to examine the month-to-month and line-by-line vols.

We can see how the vol is elevated from the back to the front monotonically for the front three expiries. Note that the earnings cycle for HTZ is usually Feb, late Apr / early May, Aug, Nov, so the most depressed vol (Sep) is actually the only expiry in that image that has an earnings. In English, there is more risk reflected in the front months than Sep even though Sep has the known volatility event.

--- SUMMARY ---
Finally, let’s turn to the Options Tab, for completeness.

I wrote about this one for TheStreet (OptionsProfits), so no specific trade analysis here. Looking across the top we can see that the monthly vols are priced to 76.06%, 69.46% and 64.18%, respectively. We can also see (in the green numbers) that Jul 14 calls and Jul 10 puts are trading. From what I see there was a risk reversal trading @ ~0.05 selling calls and buying puts. The rest of the volume in the calls look like purchases. In all, options have traded more than 2x the daily average volume in the first hour and a half while the stock is on pace for a “normal” volume day. In English, it looks like there is substantial order flow today getting long deltas in July… for whatever that’s worth.

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