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Arbitrage Opportunity In Procter And Gamble Odd-Lot Tender Offer

|Includes: COTY, The Procter & Gamble Company (PG)

In this Instablog I will lay out how to profit from the odd-lot tender of Procter and Gamble (NYSE: PG) by essentially taking on no risk at all.

Please take into consideration that the stated share prices could be different from the actual share prices mentioned in the article.

The Tender Offer

Procter and Gamble is offering its shareholders the oppurtunity to exchange their P&G shares for 3,9033 shares of Coty (NYSE:COTY) until Thursday, September 29th at midnight. The tender offer is part of the merger of Procter's beauty division and Coty.

At the current price of P&G ($88,68) and Coty ($23,65) shareholders who exchange their shares are going to get an extra value of $3,63 per P&G share.

The Odd-Lot provision

The tender offer has an extra provision for odd-lot shareholders. Shareholders who own less than 100 shares of Procter and Gamble can be assured to be able to tender all of their shares in the exchange offer. Shareholders with more than 100 shares are subject to proration if the tender offer is oversubscribed.

Making the transaction risk-free

Having less than 100 shares one knows that all of ones shares are going to be exchanged. So one can calculate the number of shares one is going to get in the exchange offer.

In the case of owning 99 shares of Procter and Gamble, the maximum amount falling under the odd-lot provision, one gets 386 shares of Coty. The surplus fractional interest will be paid out in cash.

To eliminate the risk from a drop in value of Coty shares one can now short 386 shares of Coty.

By shorting Coty shares one secures the spread offered in the tender offer ($3,63 per P&G share). If Coty shares are losing value the short gains and if Coty shares gain value the shorts lose value in the same proportion.

In total one makes $359,37 in the transaction or 4,1 percent ($559,37/ $8.779,32) in less one week.

Conclusion

The tender offer is a free lunch for small shareholders of P&G.

Please take into consideration that shares could be volatile. Therefore one should take care not to get a margin call on the shorted shares and have some additional capital in ones account.

Disclosure: I am/we are long PG.