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For the last many months Ralston was prancing around with its tail up and off to the side. Now it looks like there's a "suitor" (a Swiss 'Big Dog'). Is this dogfood buyout a Buffett/Munger style arbitrage?

January 15th Nestle announced a cash buyout of RAL at $33.50 per share. The price has settled around $31.20 to 31.60 a difference of $1.90-$2.30 (+5.7 to +6.8%)between the market price and the cash buyout price. $33.50/$31.50 = 106.30%.

RAL traded around $25 prior to the announcement, a likely landing place if the buyout fails; this could be a 20.6% loss. With an (amateur)expectation of success of 90% it looks like:

(.90 x .063)-(.10 x .206) =3.61% gain expectation without respect to time. (4.95% with 95% success)

Nestle said it expects to close before the end of the year.
		(90%)expectation       (95%)
if closes % return
12/24/2000 3.93 5.4%
11/24 4.33
10/24 4.81
09/24 5.42
08/24 6.18
07/24 7.22 9.9%
06/24 8.66
05/24 10.83
04/24 14.44
03/24/2000 21.66

Does this look right? The gain and loss seem to be easy to estimate but the expectation of success and time till close are more difficult. Because Mr. Euro placed only a 5% probability of higher competitive bid, I didn't factor that in.

With Shaw( and Buffett/Munger being the type of people they are) it was highly unlikely the Shaw deal would not go through, but with Nestle? is 90% reasonable?

RAL represents near 25% of my holdings and I had a strong belief when purchased @ $19.90 that the downside was very small (and as a midwesterner I can understand dogfood and how it is made and sold). It is not just about dogfood now and I have limited confidence in my understanding of this buyout process. Any good sources for learning about this process?

Is this a Buffett/Munger kind of arbitrage?


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