Wednesday, January 13, 2010

Cadbury (CBY) - The deal with the deal (takeover)

CBY is trading 51.13. The LIVEVOL™ Pro Summary is below.

The company is amid a hostile takeover. The Corporate Action snapshot is included below (click to enlarge). CBY has formally rejected the bid.

The company has traded over 14,500 options today in the first 2.5 hours on total daily average option volume of 1,751. The Company Tab snapshot is below (click the image to enlarge).

The biggest trade of the day was a straddle sale here on the NYSE ARCA floor 3000x. The Feb 50 straddle @ 4.25 (2.75 in calls and 1.50 in the puts). You can see the day's biggest trades and Options Tab snapshots below. Click either image to enlarge.

The Feb 50 straddle makes money if the stock at expiration stays between 45.75 - 54.25. The payout diagram is included below.

So what's going on? note CBY price is $51.13

First, the original news implies this (from above):
Takeover price: 0.2589*(29.47) + 4*(3.00 BritishPound)*($1.6292/1 BritishPound) = $50.07 which is above the current price.

NB: The ADR is four times the European stock. 100 pence = 1 British Pound. $1.6292/BritishPound is current conversion rate.

The story:

KFT has stated they will increase the cash portion of the deal (300 pence) and reduce the fraction of shares. They will not change the overall value of the bid.

CBY does not want the hostile bid from KFT - they have formally rejected it.

Third (from new service).
CBY is hoping for a deal with Hershey (HSY). The NY Post reports Cadbury's CEO Todd Stitzer hinted that he might be open to a merger with Hershey (HSY). However, The NY Post reports that a source said the company is less interested in a merger than an outright acquisition, with the Hershey board expected to decide within days whether to put together a bid to buy Cadbury. Hershey has until Jan. 23 to submit a bid.

Fourth (from new service).
The Financial Times (FT) reports:
Italian chocolate maker Ferrero is close to abandoning its attempt to acquire Cadbury. Ferrero had been considering the possibility in partnership with Hershey (HSY).

The Wall Street Journal reports that Cadbury reported sales gains and re-iterated a rejection of Kraft's bid - 2009 revenue and margins gains and a positive outlook for 2010 reinforces its defense against Kraft.

Sixth (Wall Street Journal "Heard on the Street" today).
Kraft must raise their bid for CBY to complete the takeover. It is valuing the company at 767 pence. It needs to be not less than 900 pence which would still be below expected 2009 EBITDA.

900 pence would lead to this price:
(900/763) * 50.07 = 59.06

Warren Buffet controls 9.4% of the float and is the largest shareholder through Berkshire and pesonal holdings. He does not agree with the takeover, claiming dilution of the KFT shares.

So the takeover price is hostile and rejected. It is a floating price with a greater amount possibly given in cash. Throw in the fact that Warren Buffet is the largest shareholder and is rejecting the bid as well.

This all leads to vol in the options. The bet with the straddle is that the possibility of a rival bid goes away and then KFT may have no interest or incentive to raise the bid. If that's the case, the straddle seller could be a big winner. Keep in mind, the price only has stay in the range by the third week of Feb - that's options expo.

Of course, any number of things could blow this straddle up like - a rival bid, an increased bid, a removed bid and I'm sure many other sceanrios.

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