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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
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  • A 19% Annualized Return For The Holidays 0 comments
    Dec 17, 2012 10:40 AM | about stocks: CEO

    My idea is to buy Nexen Inc (NXY) which last traded at $26.78.

    Target

    Ticker

    Value

    Spread

    Closing

    Return

    Nexen

    NXY

    $27.50

    $0.70

    By 1/31/13

    19%

    Why? CNOOC Limited (NYSE:CEO) is in the process of acquiring NXY for $27.50 in cash. They have successfully secured the key regulatory approval in Canada and are awaiting the US approval from the Committee on Foreign Investment in the United States (CFIUS). While I am using a late January closing estimate, it is quite possible that the US review and the subsequent deal closing are able to wrap up somewhat earlier than that. Since this is an all-cash merger, you can buy your shares and go on vacation - this idea does not require an equity hedge, does not require that you remember to tender your shares, and does not even require that you deal with currency issues since NXY trades in US dollars on the NYSE.

    Where is the safety? Since the Canadian approval was announced, additional information has come to light in terms of the steps that CNOOC has been willing to take to appease Canadian regulators. It would be surprising if CNOOC was willing to take such steps unless they had the information and judgment that they would also be getting US approval. Since CNOOC is a state owned enterprise, this is the kind of deal that generates political harangues and press. But this deal is unlikely to be blocked. In practice, CFUIS is mostly used for protectionism and for corporate defenses in unsolicited bids. In this deal, competitors are not complaining and the deal is being done on a friendly basis. There does not appear to be any legitimate national security issues that would delay the deal.

    Why is the spread there? NXY is currently up over 68% this year after the substantial premium that CNOOC is paying. Many of NXY holders are tax-paying Americans who are facing a massive tax hike in the New Year. While the last $0.70 is prospectively attractive, there is a significant after-tax difference between shareholders (such as the author) who have owned NXY and are sitting on a taxable gain and new shareholders who do not face the same tax issue. So, there will probably be some tax-related NXY selling over the next few weeks that will keep this spread substantially wider than it would otherwise be. This spread does not represent the probabilistically weighted outcomes; it represents rational tax-sellers who leave you with a bargain worth exploiting for profit.

    Disclosure: I am long NXY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: Additionally, I have written December $27 NXY puts.Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

    Themes: long-ideas Stocks: CEO
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