Tuesday, November 26, 2013

JOSB, MW - Takeover Tango; But Has the Option Market Missed the Risk?

JOSB is trading $56.25, up 11.2% with IV30™ down 32.2%. The Symbol Summary is included below.

Provided by Livevol

MW is trading up 8.1% with IV30™ up 3.3%.  That Symbol Summary is included below.

Provided by Livevol

Jos. A. Bank Clothiers, Inc. (Jos. A. Bank) is a designer, manufacturer, retailer and direct marketer (through stores, catalog call center and Internet) of men’s tailored and casual clothing and accessories and is a retailer of tuxedo rental products.

The Men’s Wearhouse, Inc. is a specialty retailer of men’s suits and a provider of tuxedo rental product in the United States and Canada. At January 28, 2012, the Company operated 1,166 retail stores, with 1,049 stores in the United States and 117 stores in Canada.

So this is a fascinating story of a takeover bid from a company that has a takeover bid on it from the same company.  JOSB bid on MW for a takeover and MW has just bid on JOSB for a takeover.  Yup, it does happen...

First, let's turn to the news, then the stock price and volatility action:

(Reuters) - Men's Wearhouse Inc (MW) struck back at Jos. A. Bank Clothiers Inc (JOSB) with a $1.5 billion bid to acquire the suit and tuxedo retailer, only weeks after rejecting a takeover offer from its smaller rival.

Men's Wearhouse, under pressure from activist shareholders to merge, offered $55 per share in cash for Jos. A. Bank, a offer that values the smaller retailer's stock at a 9 percent premium to its close on Monday.

Jos. A. Bank shares rose as much as 12 percent on Tuesday to a two-and-a-half year high of $56.91, topping the offer in a sign investors might be expecting a better bid. Men's Wearhouse shares rose as much as 10 percent to a year-high.

"For the shareholders of Men's Warehouse and for Jos. A. Bank, Christmas has come early. They will see huge benefits to the merging of these two companies," said Jerry Reisman, an M&A expert at law firm Reisman Peirez Reisman and Capobianco LLP.

The combined company would have 1,700 stores that rent tuxedos and sell suits, a scale that in the past has raised antitrust questions about a merger.

The retaliatory offer from Men's Wearhouse, which the company said implies an enterprise value of about $1.2 billion for Jos. A. Bank, follows pressure from its largest shareholder, New York-based hedge fund Eminence Capital LLC.

Eminence, along with other hedge funds that hold about 30 percent of Men's Wearhouse shares, had tried to persuade other investors to pressure the company into accepting the takeover offer from Jos. A. Bank.

Source: Reuters via Yahoo! Finance; Men's Wearhouse turns tables with bid for Jos. A. Bank, written by Aditi Shrivastava.

Well there you have it.  There has been substantial price action in both names.  Let's turn to the two-year Charts Tab where the prices are measured as returns over the time period.  The yellow line is MW and the red line is JOSB.

Provided by Livevol

A number of points to note:

1. MW is up nearly 70% in two years whereas JOSB just by today's pop finally turned positive.
2. That straight line up in the yellow chart (MW) is due to the JOSB bid on MW.
3. Very interestingly, JOSB stock also rose with the news of its bid on MW -- which is pretty rare.
4. JOSB gapped up on the MW bid news.
5. MW oddly has also risen abruptly today on news of its takeover bid for JOSB.

In English, however we slice this, the equity market loves the idea of MW and JOSB merging -- regardless of which firm is the initiator.

But there is a volatility story here, and this is compelling both on an overall vol level and at the skew level.  Let's turn to the two-year IV30™ chart for JOSB, below.

Provided by Livevol

We can see the massive drop in IV30™ for JOSB today on news of MW trying its part at a takeover.  The implied vol for JOSB is now sitting in the 19th percentile (annual), or in English, it's really low.  A vol dip on takeover news is common, it generally reflects that the takeover is likely to happen and that the firm being acquired has much less risk in its equity price after the takeover news.  But... do we feel that way about JOSB?  I dunno...

Interestingly, the option market also reflects no change at all in the upside potential for JOSB.  Let's turn to the Skew Tab for JOSB yesterday (11-25-2013) and then today (11-26-2013).

Provided by Livevol

Provided by Livevol

The point here is that the skew yesterday did not reflect upside risk (i.e. upside potential) relative to downside risk.  Or said differently, the option market apparently mis-priced the upside potential in JOSB.  Could the option market be mis-pricing the volatility in general for JOSB?  Does it feel like it should be in the 19th percentile on an annual level?  I can make an argument for both, but both means uncertainty, and uncertainty = volatility.

To read more about skew, what is and why it exists you can click the title below:

Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

Across the top we can see the monthly for JOSB are now priced to 27.78% for Dec (down 12.9 vol points) and 25.22% for Jan (down 11.9 vol points).

This is trade analysis, not a recommendation.

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