Late last week, the FCC approved Tribune Company to own print and broadcast media in the same market. Why was this important? Tribune Company (TRB) is going private and the FCC approval was critical to this transaction. Without FCC approval, the deal might not have gone through. With that hurdle out of the way, what’s to stop it now?
And how can we make money from it?
The Details
Real estate tycoon Sam Zell is planning a buyout of Tribune Company (TRB) at the end of the year for $34 a share. Let me rephrase that-the company is expected to go private in the next 27 days and plans to buy its stock from shareholders at $34 a share.
If the deal can’t be completed by December 31st, the company will continue its quest to privatize and will begin paying shareholders an annualized 8% interest rate on their shares until the company goes private.
The Stock
The stock is currently trading around $30.50. If the deal goes through by December 31st, yesterday’s buyers will earn about 11% in a month-an annualized return of more than 265%.
The Hurdles
Very little is stopping this buyout plan now. The FCC hurdle was the major one. Though the company needs to get the deal done by the end of the month to qualify for tax credits, the paperwork seems to be in order to push the deal through no matter what.
Let’s put some probabilities on this and try to quantify the risks:
A Pabrai / Kelly Risk Analysis
What are the odds that the deal will go through by the end of the month? I’ve seen bigger deals fall through for no apparent reason other than one company couldn’t get its ass in gear. Remember GE’s planned 8 billion acquisition of one of Abbott’s divisions earlier this year? Best as I can tell, Abbott fumbled and couldn’t get the required paperwork done in time and GE pulled out.
Even though Tribune has been planning to do this deal since early this year, let’s assume that there is a 50% chance that the company will complete its buyout by December 31.
What if the company can’t get it done in the next four weeks? We know the company still wants to privatize and is offering a premium of 8% annualized if it can’t get the deal done by the end of 2007. Odds of it getting done in early to mid-2008? I’ll say 30%.
Of course, the deal can fall through and not close at all. In that case, today’s buyers would simply hold Tribune stock. Let’s say there is a nearly 20% chance of that happening.
Finally-the doomsday case. There is a small chance that the deal will fall through and that the company will fall off the face of the earth by the end of 2007. Sure, it’s a small chance. Still, we’ll ascribe a <1% chance of that happening.
Making Sense of The Odds
In this merger/buyout arbitrage play, I estimate that there is a 50% chance to make an annualized return of >265% by the end of 2007. If the deal can’t close until June of 2008, I believe that there is a 30% chance of earning 30% or greater on an annualized basis once you add in the 8% interest being paid.
I believe that there is a one in five (or 20%) chance that the deal won’t go through. In that case, I’ll hold Tribune stock, or sell it at a loss. On news of the deal failing, I’ll put that loss at 15% if I can sell around $26.
If the company goes defunct in the next 30 days, I’ll lose everything.
The Odds: How I See Them
When the odds are in your favor, bet big. I believe that the Tribune buyout presents an interesting opportunity to make a substantial amount of money in a very short timespan. It’s not guaranteed or risk-free; still, I believe that the odds are in favor of today’s buyers.
Use Arbitrage
Whether or not you buy Tribune stock today, you should consider the use of arbitrage in your investing. Whether you consider pure buyout arbitrage like we are doing with Tribune, or you are using a form of arbitrage in selling options against your positions, the use of arbitrage might make the difference between a good retirement and a great one.
Filed under: Workouts, Arbitrage, & Hedges
Related Stocks: TRB
MikeR,
I like your idea about selling the downside puts and collecting $1.20. A trade I like better is doing the Jan ‘08 30 buy write for $3.00. The reason I like this a bit better is that you get downside protection down to $27.00 (vs your $26.30), but you are able to participate in the upside for $3.00. So for giving up .70 cents of downside protection you receive $3.00 upside profit.
( REPLY )
Steve,
I am selling the Dec. 27.5-strike puts. I sold them for $1.20. They expire December 22. If TRB is above 27.50 on Dec 22 I pocket the $1.20 per share. If TRB is below 27.5 on Dec 22 I am forced to buy TRB at $27.50, no matter what TRB is trading at. So if TRB goes to zero in the next 2.5 weeks I loose ($27.50-$1.20) per share, my maximum risk.
( REPLY )
Does anyone have a comment on the liklihood, as of today, of the transaction still going through given the US Senate’s ruling to impose a multi-month review period to allowing dual ownership of media in the 20 largest markets.
I feel this could hamper the ability of the buyer of Tribune to offload some of the properties in order to pay their soon-to-be large debt load.
Also would that decision over-rule the special situation given to Tribune?
It seems that the market is reacting negatively to these announcements giving possibly a better implied return should the deal go through.
Regardless of the outcome for this particular position I feel that it is a great example of keeping your eyes open for opportunity.
Steve
( REPLY )
I am not experienced with this sort of activity in the least, but from an article on MSN
“The legislation, even if successful, is not expected to affect the proposed $8.2 billion buyout of the Tribune Co., which was approved by the FCC last week. It is unclear whether there would be any potential long-term impact on the company.”
- source
Not sure if the ‘unclear potential impact’ will have an effect on Sam Zell’s buying decision or not..
Also, from the press release on Nov. 30th
“The company also asked for an extension of existing waivers of the FCC’s cross-ownership rule in New York, Los Angeles, Hartford and South Florida — markets in which Tribune operates both a newspaper and television station. The waivers granted today are temporary, pending the outcome of the FCC’s ongoing review of media ownership rules. In Chicago, the company will be exempt from cross-ownership restrictions through a permanent waiver provision. ”
-source
So, I guess they will always have the cross-ownership in Chicago.. but the potential of losing the ones in NY, LA, Hartford, South Florida may deter the deal?
I am completely new to analyzing this sort of deal.. How strong of a negative effect is this?
( REPLY )
As you’ll see in the blog post, I put the chance of the deal failing at about 20%. This is certainly not a “no-brainer”, but it does present an opportunity with great upside potential.
The proposed legislation shouldn’t affect the Tribune deal as it will affect future reviews. Tribune’s waiver will likely be grandfathered in as it was granted when the legislation was not in place.
I looked at the OTM (out of the money) put and call activity, and it appears to be fairly balanced. I never use investor sentiment or price as a guage because, for the most part, investors and institutions are generally wrong and usually earn returns equal to or less than the markets.
What’s the move here? Consider buying Tribune with some protection.
- Throw a sell stop on your position to limit your downside;
- sell calls against your position to lower your effective net basis;
- roll the dice and buy TRB because you think the deal will go through;
- find a new opportunity.
If you have a ton of doubt or are entirely unsure and uncomfortable, move on. I say it a lot, but only because it is the right strategy!
Hope that helps!
( REPLY )
Joel Greenblatt in his book “You Can Be a Stock Market Genius” (yes the title is a turn off) has many interesting case stodies of arbitrage, spin-offs, restructuring, bankruptcy, etc plays. If I recall correctly he talks about reading the Wall Street Journal, Barron’s, etc to find these plays.
( REPLY )
Thanks, MikeR.. I think I might pick that up! These sort of deals sure are interesting 
.
Anyone get lucky, or was smart enough, to of bought it yesterday when it was at $28 or so? News today seems to of nearly sealed the deal..
Time for me to hang on til the 1st or for some serious news, in any case.
( REPLY )
I’ve owned this since about 27.50. Here’s a good couple of posts on the topic by Saul Sterman. He’s been adamant about the deal going through since August.
http://www.crossprofit.com/article.asp?id=140
( REPLY )
What am I missing with EAS?
EAS is a diversified utility in the northeast. EAS is trading at $25 with a 52-week low of $22.26.
Iberdrola is trying to acquire EAS for $28.50 cash per share of EAS. There are
concerns that NY regulators will impose unacceptable condition on the deal and it will fall through.
The September $22.50 strike puts are bid at $0.90. The worst case seems the deal
falls through before the puts expire in 44 days and EAS trades down to the
neighborhood of its 52-week low. So you end up with EAS put to you at $22.50, with a dividend yield at that price of 5.5%, plus the $0.90 per share put premium.
I must be missing something for the MMs to be pricing such a premium in those
puts?
( REPLY )
Writing the December 27.5-strike puts looks interesting. They are going for $1.20 a share and expire on Dec. 22. That reduces your risk to an entry price of about $26.30 per share plus commissions.
( REPLY )