The rumor mill is at it again. On Friday, Nokia's shares jumped 6.7% on unconfirmed rumors that the Finnish mobile giant could be a takeover target for. For Nokia, I believe the time has come when a buyout is not a question of if, but a question of when.
Shares of Nokia are currently trading at $3.02, which is approximately a 95% discount from its all-time high of $56 in April 2000 and a 92% discount from its most recent high of $40 in October 2007. Now at such low stock prices only two options are exist, either Nokia is going bankrupt or as mentioned it is being taken over. The only thing that is not going to happen is a status quo.
Considering that Nokia has a hugely valuable patent portfolio, bankruptcy is not an option, which pretty much leaves a buyout as the way forward. A number of parties could be interested in Nokia, ranging from rivals Samsung to strategic partners such as Microsoft.
The company currently has approximately $6bn in debt (Short Term + Long Term) which amounts to a Debt/Equity ratio of around 0.45, but recent concerns about the company's ability to service its debt may deter Private Equity players from undertaking an LBO.
Now the question is that if Nokia were to be bought out, what would be a fair price? Consensus estimates obtained from Yahoo Finance indicate a mean target price of $4.2 and a median target price of $4 per share. In my opinion it would be safe to assume that any takeover bid would be at values greater than $4/sh.
Short: Call at strike $3.5 (Premium: $0.51)
Long: Call at strike $4.0 (Premium: $0.38)
Current Price of Stock: $3.02
Total Cost of Strategy: 3.02 + 0.38 - 0.51 = $2.89
So even at the current price, this strategy is profitable.