Monday, June 4, 2012

Iron Mountain (IRM) - "A Significant Binary Catalyst on Immediate Horizon"

IRM is trading $27.35, down 0.6% with IV30™ down 3.3%. The LIVEVOL® Pro Summary is below.



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Iron Mountain Incorporated (Iron Mountain) provides information management services. The Company offers records management services, data protection and recovery services and information destruction services.

This is a fascinating story surrounding a tech company's decision on whether or not it will re-constitute itself as a REIT. A quote from Briefing (details included below in the article) reads that the conversion is: "a significant binary catalyst on the immediate horizon." Let's start with a bit of news, then onto some analysis with more news interwoven.

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In early March, the activist hedge fund Elliott Management launched a proxy fight to elect four members to Iron Mountain’s board and urged the company to consider converting into a REIT. Davis Selected Advisers, Iron Mountain’s top shareholder with a 21.1% stake, filed a 13D with the SEC last Friday confirming that it intends to back Elliott’s nominees.

Iron Mountain, a Boston-based document and data storage and services company, has responded to Elliott by implementing a poison pill and urging shareholders to reject Elliott’s proposals. The company said it studied the REIT proposal with advisors for several months and decided it is not in the best interest of shareholders.

Source: FT via yahoo! Finance; Iron Mountain REIT debate heats up - analysis, written by Jay Antenen.
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That's a good start. Let's turn to the Charts Tab (six months), below, to see an awesome vol move. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).



On the stock side, I've highlighted the recent drop in stock price. On the 5-7-2012 the stock closed at $31.78. Less than a month later the stock is down ~14% as of this writing. That doesn't seem like a huge drop, but consider that the 52 wk range in IRM is just [$27.02, $34.94], so the stock is on the brink of a new low. On the vol side, we can see a large climb in the short-term implied. Since the vol drop off of earnings on 4-26-2012, IV30™ is up from 33.7% to 70.1%, or a 108% increase. The 52 wk range in IV30™ is [19.38%, 72.48%], so as the stock has hit recent annual lows, the vol has hit annual highs.

So why the vol rise? Check this out (from the same FT article):

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Elliott claimed that Iron Mountain would trade around USD 50 a share by converting to a REIT. If Iron Mountain converts and adopts Elliott’s suggestions for business improvements, the fund projects the company could be worth around USD 77 a share and offer a 5% dividend yield, according to an SEC filing.

Source: FT via yahoo! Finance; Iron Mountain REIT debate heats up - analysis, written by Jay Antenen.
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Ummm, yeah, that's more than $27.35. The next question is, how soon will a decision be made? Let's turn to the Skew Tab to see what the option market reflects.



Note how dramatic the vol diff is between the front three months. While the IV30™ (a weighted average) is ~70%, Jun vol is priced over 100%, while Jul is priced to ~65%. Looking further out, Oct is priced to just ~45%. In English, the option market reflects a risky (volatility creating) event (decision) within Jun expiry. So, ya know, really really soon 'n stuff. Here's a quick snippet from Briefing:

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Iron Mountain: The 06/09/12 deadline IRM set to conclude if it will convert to a REIT is little more than a week away - Oppenheimer (29.43 )

Oppenheimer notes the 06/09/12 deadline IRM set to conclude if it will convert to a REIT is little more than a week away. Anticipated as early as 1Q12 results, the decision appears to be coming down to the wire. Perceived "late cycle" IRM's organic rev has grown in the low-single digits the past three years, and isn't anticipated to rebound near term. As a result, sentiment surrounding fundamentals has been subdued. However, the pending REIT catalyst represents a significant binary catalyst on the immediate horizon. REIT conversion, perceived as a lower probability, would likely ignite substantial appreciation. No conversion, carrying a higher probability, would likely temper share value, though to a lesser magnitude in their view.

(Bolding not in original text)

Provided by Briefing (www.briefing.com)
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Nice... Finally, let's turn to the Options Tab for completeness and position analysis.



I've highlighted the OTM calls in Jul simply to draw attention to the open interest showing over 14k and 34k in the 30 and 32.5 calls. Is that a lot? Well, I've included the Options Tab from 1-3-2012 and 4-3-2012, respectively, below.





We can see the combined OI in all of the OTM calls for both dates is less than the current 14k OI in Jul 30 calls and way less than the current 34k OI in the Jul 32.5 calls.

So, in English, the option market reflects the likelihood of a risky binary event in the next two weeks and accumulated option positions are very large in OTM calls. We'll see...

This is trade analysis, not a recommendation.

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4 comments:

  1. When did teh market start to look for the event? You showed 6-4 skew, but did it shift overnight or wsa it expecting June expiration for quite some time? Thx

    ReplyDelete
  2. Jun was elevated for a while.. certainly was not overnight.

    ReplyDelete
  3. Right, at some point June must shifted to become severely elevated. Do you know when?

    ReplyDelete