BBY is trading $18.14, up 1.6& with IV30™ up 13.9%. The
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Best Buy Co., Inc. is a multinational retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services.
This is a vol and skew note on a company embroiled in what appears to be an unwanted private takeover bid from it's ex-Chairman. Let's start with some news, then move onto the vol 'n stuff 'n stuff. I do also note that I wrote about BBY on 7-2-2012; sort of a pre-cursor to today's news. You can read that post here:
Best Buy (BBY) - Stock and Vol Up on LBO "No" News
Here's the news that started this story:
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(Reuters) - Best Buy Co Inc's (BBY.N) former Chairman Richard Schulze is not expected to present a buyout or other proposal to the company's board anytime soon, a person familiar with the situation said.
Media reports said Schulze was close to presenting an offer for the consumer electronics chain. Discussions around a leveraged buyout of the company are still in the early stages, the person said.
Source: Reuters via Yahoo! Finance;
No bid by Best Buy ex-chairman to come soon: source, reporting By Nadia Damouni; editing by Gerald E. McCormick.
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So that was sort of no news with news expected soon, but denied. But here are some headlines from Briefing.com in chronological order (Provided by Briefing.com (www.briefing.com)):
06-Jul-12 15:23 ET: Best Buy to layoff 2400 employees - CNBC
11-Jul-12 09:33 ET: HHGregg at a 3.5 year low following Q1 warning and FY13 guidance cut, now off ~32% (7.80 -3.74) -Update BBY -6%
13-Jul-12 09:42 ET: Best Buy trading lower off the open; Hearing cautious comments at Cleveland Research
30-Jul-12 08:44 ET: Best Buy spikes to $20 then comes back to ~$19 following renewed takeover reports;
30-Jul-12 08:43 ET: Best Buy founder Schulze recruting executive team for buyout - Bloomberg
06-Aug-12 08:35 ET: Best Buy Founder Richard Schulze confirms proposal to acquire BBY for $24.00 to $26.00 per share
Richard Schulze, Founder and former Chairman of BBY, submitted a written proposal to the Best Buy Board of Directors to acquire all of the outstanding shares of the company that he does not already own for a price of $24.00 to $26.00 per share in cash. The purchase price, which is based on current public information and is subject to due diligence, represents a premium of 36% to 47% to Best Buy's closing stock price of $17.64 on August 3, 2012. Schulze is Best Buy's largest shareholder, controlling 20.1% of Best Buy shares.
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And finally, the news today:
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29-Aug-12 07:08 ET: Best Buy: Buyout feasible albeit unlikely - Oppenheimer
OpCo notes clients continue to ask whether the firm believes former BBY chairman Richard Schulze will prove successful in his attempt to take the Co private. The BBY situation is clearly fluid. Shares are likely to remain susceptible to an ongoing deluge of data from BBY and its potential suitors. In the end, firm views a deal to purchase Best Buy as unlikely. Ample cash flow and a still healthy balance sheet suggest that BBY could support the added leverage associated with a leveraged buyout (LBO). OpCo believes, however, that potential private equity buyers will ultimately balk at a deteriorating business model that is increasingly falling victim to the inroads of new non-traditional CE competitors and a weak product cycle.
Provided by Briefing.com (www.briefing.com)
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OK, let's actually look at what's going down with the options. Ultimately, it's the skew that caught my attention, but let's start with Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).
On the stock side we can see the decline from ~$28 in late March, to now in the $18 range. While the ride has been bumpy, BBY is down from $25.43 as of one year ago, or a -28.7% move. At one point in the last two years, BBY was trading near $45 a share. The 52 wk range in stock price is [$16.25, $27.89].
On the vol side we can see a rather bumpy ride in the implied as well. Most notably however is the move today -- a significant pop raising the vol to the 85th percentile (annual). The 52 wk range in IV30™ is [29.46%, 73.33%].
Let's turn to the Skew Tab where we can see a phenomenally interesting term structure.
We can see that the $16 strike puts are all priced pretty similarly across the front three months. Then there's an awesome upside skew in the Sep options, a noteworthy but less abrupt upside skew in the Oct options and then a downward sloping upside skew in the Dec options.
Simply stated, the option market reflects substantially greater upside risk (potential) in Sep than Oct, and in Oct than in Dec. Extrapolating a bit of meaning into this, we might also say that the option market reflects the takeover / private decision / ordeal will be over by Dec expo.
As a definitive example of how much the skew shape has changed with the news headlines over the last two months (above), I've included the Skew Tab from 7-2-2012, below:
We can see a parabolic shape to the Jul options and a vol diff that was beginning to open up between the OTM calls in each month, but the shape has changed considerably. Note how the OTM puts were still priced higher than the ATM options in both expiries back in early Jul and how that is clearly not the case right now. Very cool.
Let's turn to the Options Tab, for completeness.
We can see the monthly vols across the top are priced to 67.78%, 63.35% and 59.54%, respectively for Sep, Oct and Dec. Looking more closely, we can see the vol diff between the Sep and Oct OTM calls, getting as large as 17 vol points in the Sep/Oct 25 call spread (while the ATM vol diff is just five vol points).
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