Seeking Alpha
Special situations, contrarian, arbitrage, event-driven
Profile| Send Message|
( followers)  

Option chains give clues as to the likelihood of a deal either being in trouble, or at the other extreme in the clear. Let's look at two that the option markets are saying will be completed.

Smithfield Foods-Shuanghui International

Smithfield agreed to sell itself to Shuanghui for $34 per share in May. Smithfield Foods is a global food company and the world's largest pork processor and hog producer. Shuanghui is the majority shareholder of Henan Shuanghui Investment & Development Co. which is China's largest meat processing enterprise. The deal if completed would be the biggest Chinese purchase of a U.S. firm.

The Merger Update

Last week the companies received CFIUS Clearance, after a summer of US political rumblings about selling to a Chinese company. The shareholder vote is scheduled for September 24 just 7 trading days from now. The companies expect to close the transaction shortly after the vote, meaning late September/early October. ISS Thursday recommended that shareholders vote in favor of the acquisition.

It's Not Over Until It's Over

Activist Starboard Value LP has said it will vote against the deal and has proposed breaking up Smithfield as a way to extract additional value for shareholders. Starboard has said it has received interest from third parties that may want to buy Smithfield's individual assets.

The Option Chains

For most of Thursday every single strike price 34 or under in every single option series had a bid of zero. That is rare for a liquid, high profile deal. Even Dell, a deal that all but wrapped up Thursday, shows a 5 cent bid for the January 13 Put and February 13 Put. Back to SFD, Put sellers can only get a nickel for ATM or OTM Puts at this point. That signifies that shareholders do not want protection and think 34 will be the final price.

However, there was an explosion in the calls Thursday

Sept 35 Call1,506 contracts05-10 cents
Oct 34 Call7,079 contracts30-35 cents
Oct 35 Call9,657 contracts15-20 cents
Oct 36 Call10,024 contracts05-10 cents
Jan 34 Call15,897 contracts35-40 cents
Jan 35 Call23,215 contracts15-20 cents

What does this mean? With decent premium in the OTM 35 calls at first glance someone may think Starboard will be able to make some news before the 24th. But according to LiveVol there were two 10K contract blocks that went off Thursday, one for the Jan 34 call and the other for the Jan 35 call and they both went off at the bid indicating the calls were sold not purchased. To be fair, there were three smaller blocks totaling 10K contracts that traded at the ask so it is likely those calls were bought. Also, a portion of the calls were part of an option spread, either calendar, bull call, bear call or butterfly.

Is there any money to make here?

SFD's trading range Thursday was 34.11-34.27. There was a big spike in stock price and volume just before 2pm which coincided with the 10K Jan 35 block. Perhaps a covered call was initiated. A trader could buy SFD hoping for an overbid or short the equity betting against an overbid. To me neither play would give a trader an acceptable risk/reward.

For those who already own shares selling the Oct 34 call or the Jan 34 call against the stock position would generate additional income by forfeiting the overbid right. For those shareholders who want to hedge their bets they could sell the Jan 35 call and take in some premium and still have the chance of capturing an extra dollar per share.

What is telling to me is that the Puts aren't buying the Calls' story. Where is the volatility in the Put contracts? If in fact Starboard is able to find alternative bidders for Smithfield at a higher price closing those deals would take time and lack the current certainty of price ($34) and time (Sept 24) that options like. The uncertainty even of a higher bid normally would keep some volatility in the Puts.

Intermec-Honeywell

A deal that has been going on since 2012 is the Intermec/Honeywell merger. Honeywell is in the process of buying IN for 600 million dollars or $10 per share. Intermec is a provider of supply-chain products, printers and bar-code scanners.

The Merger Update

Intermec shareholders approved the deal in March. The European Commission approved the merger in mid June, noting that the union would not hurt Honeywell's competitors or consumers. All that remains is the FTC to sign off. On June 10, the companies extended the deadline to October 10,three months after the FTC had requested additional information.

The Option Chains

There is virtually no open interest in IN options. Three of the four months with options have a total of 2 puts in the open interest column. And that's all the strikes combined. There are a modest 527 Puts open in the September series with 472 of them at the 10 strike. In the last three months only 52 contracts have traded. All strikes 10 and under are bidding zero and have for several months now.

96% of IN Shares are held by Institutional & Mutual Fund Owners including big names such as Wells Fargo, Vanguard and Morgan Stanley. One would think that if there were any real chance of the FTC blocking HON/IN the Institutions and funds would have bought PUT protection for their shares. IN hasn't closed below 9.85 since before the 4th of July.

Is there any money to make here?

IN is trading at 9.88, 12 cents shy of the buyout price, or 1.2%. Assuming an October 10 close that works out to a 14% ARR. To juice the return the December 10 call is bidding 10 cents so one could sell those calls against his long stock position reducing his cost by 10 cents (there are only 50 contracts being bid at that price at the time of this writing).

Source: Option Chains Give Clues About IN And SFD Deals

Additional disclosure: I am also short IN December 10 calls as a covered call. I am short SFD Jan 2015 32 Puts.