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Casey's General Stores Inc. (NASDAQ:CASY) shares rose 7.9% to $41.96 at the open yesterday morning, days after the company's board recommended against Alimentation Couche-Tard Inc.'s revised tender offer to acquire Casey's for $38.50 a share. Tuesday it announced it's gotten a preliminary proposal from a "strategic third party" regarding a consensual transaction at $40 a share. While the company said that it's worth more than that, it said it's authorized discussions with the third party to see if an agreement can be reached.

But the biggest profits by far were made by the call buyers. The Sept $40 calls which closed at just $0.20 on Friday sold as high as $2.20 Tuesday morning. Was that an unlikely long shot that happened to pay off ? I don't think so. I was one of those call buyers, having bought the calls at .30 and .25 on Aug 27, and adding to my position on Aug 31 at .20, making my average price .23. Yesterday morning I sold all of my calls at $2.00 for an 870% gain. How did I come upon this opportunity ? Do I get involved in every M&A deal, hoping to get lucky ? Absolutely not. My reasoning for betting on CASY appreciating in the very near future is below.

When looking at M&A deals for opportunities, I look for indications that the current offer might be raised. Such indicators are:

- The current bid is too low. When BHP Billiton (NYSE:BHP) offered $130 a share for Potash (NYSE:POT) a mere 20% premium for the company that holds 50% of the world's potash resources in the middle of a food commodities bull, that was a low-ball bid. Unfortunately this was obvious for the entire market and POT was trading at $150 almost immediately after POT turned down the bid.

- Target company management rejects the bid as being too low. Recent examples are : POT, GENZ, CASY, ARG, CYPB...This is not the best indicator, so I'm usually looking to see this in combination with one of the other indicators. We all remember when Microsoft (NASDAQ:MSFT) bid for Yahoo (NASDAQ:YHOO) - Yahoo rejected the bid as too low, but MSFT never raised their bid and no other bidder stepped in.

-Target company is cash rich, giving any acquirer an instant rebate. Recently 3M (NYSE:MMM) offered to pay $10.50 per share for Cogent (COGT) an offer that was only $1.50 above the market price before the news. But the bid seems to hugely undervalue COGT, considering they have $273 Mil in cash or approx. $3 per share, which 3M will receive if the acquisition goes through. This brings the actual price 3M will have paid to $7.50 - a steal. Although management has agreed to this fire-sale deal, shareholders are suing against the agreement, and it's quite likely that either 3M will raise the bid to appease shareholders, or another bidder may step in, keeping in mind there is a lot of room to improve the bid and still acquire COGT at a good price.

- Target company management agrees to be acquired, but activist shareholders sue against the agreement price. As a result, very often the bidder may raise the bid to get the shareholders agreement or the shareholders lawsuit may force the company management to look for higher bidders. The situation may be difficult to analyze because it is usually unclear, why the target management accepted the bid. It maybe that target's executives see the status of their company as worse than the public is aware. Or it may be that the current bid includes sweet severance packages or golden parachutes for the target's executives, or high positions in the combined company - deal the executives may not get from another (albeit higher) bidder. Examples : COGT, BKC, DYN. Although Dynegy's Board of directors agreed to be acquired by the Blackstone Group (NYSE:BX) for $4.50 a share, several law firms immediately commenced investigations and lawsuits on behalf of shareholders, and the stock was trading at $4.90 just a couple of days after, in anticipation of a higher bid.

Disclosure: Long calls in COGT, BKC, GENZ. Closed position in CASY Tuesday morning.

Source: Casey's Acquisition Talks and Four Signs of When an Offer Might Be Raised