What Are BCE Put Options Telling Us?

My sincere apologies to those readers who could care less about the BCE Inc. (BCE) takeover saga, but with a C$50 billion price tag, at least try to fein some interest. (Or troll elsewhere in the blogosphere.)

If you wanted to hedge out some of the deal risk associated with the Ontario Teachers' Pension Plan [OTPPB]/BCE takeover, you would be asked to pay C$4.55 to buy C$40 June puts. If the stock was trading below C$40 on the third Friday in June, you could sell your BCE at C$40 and run. However, the problem is that you’d be netting just C$35.45 per for your 100 BCE shares (assume no commission on any trades) once you factor in the cost of the puts. C$35.35 is well below the C$37.96 that you could exit at today.

Naturally, if the BCE going private deal appears as though it will close by the time that week comes around, the stock might be trading above C$41 by then - so you’d watch the put expire worthless. However, if the deal actually closed at C$42.75 in June, you’d get that number, less the C$4.55 cost of the expired option contract - you’d net C$38.20. This is barely above where you could sell the stock today.

Let’s look at it a different way. If we accept that C$42.75 is still the clearing price, and C$28 is the price the stock will settle out if the deal falls apart, with a C$37.96 quote right now, the market is telling us that there is a 67.5% chance the deal will close at the original offer price (C$4.79 upside and C$9.96 downside).

I know that the banks are rallying this week, but if Royal Bank of Scotland (RBSPF.PK) is considering a rights offering to bolster its balance sheet, and Citigroup (C) just wrote off another C$17 billion, the backdrop for new mega-LBO loans hasn’t improved. Neverthess, BCE shares are up over C$2 in the space of two weeks.

What do good earnings out of Google (GOOG) have to do with the Canadian telco buyout world? More likely, BCE shares are up given the positive outcomes with the CRTC, Industry Canada, and a better tone to the S&P 500. None of which were ever in doubt, or have any direct relevance to the BCE lending syndicate’s desire to close the deal.

Having just received the quarterly BCE dividend, perhaps it’s time for us junior arbs to move on. To stick it out, you have to believe the odds of the deal closing in eight weeks at C$42.75 are better than 2-1. That’s not an easy call to make, given the lack of any BCE rumors whatsoever (see prior post “Are the lawyers turning BCE documents?” Aptil 18-08), the collapse of the Clear Channel deal (CCU), and the ongoing troubles with many of OTPPB’s would-be lead lenders.

If arbing is your flavor, then take a look at Research in Motion (RIMM) which is up $30 in a month. Why not pile in there? Or you can wait until the worry-wart hedgies drive BCE back down below $36, where the risk/reward profile is more appealing than today.

Disclosure: I own RIMM.

Comments

[SDS]

Mark, where does your C$28 failure price estimate come from? A lot of the analysis depends upon that assumption.