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A little merger arbitrage opportunity.

One of my holdings, BPY, has just had a tender offer for a fixed $12.
It's trading at $11.27 now (changing fast), up from yesterday's undisturbed $10.20.
You could buy 'em now, tender them all, and make $0.72 per share = 6.5% fairly quickly.

The only way this is not free money is if the tender offer is oversubscribed,
in which case you sell only a pro-rata fraction of the shares at $12, and get "stuck" with the rest.

I own a very large number of shares in this.
I think they're probably worth closer to $20, and won't be tendering any, but others have differing opinions.
Still, getting "stuck" with some of the tendered shares from the arb probably isn't so bad.

They own a lot of offices and malls, which are not exactly in fashion right now, to say the least.
The malls are very good ones and were purchased at a big discount, but (with hindsight) not big enough.
They have a preposterously massive dividend yield of 13.5% that most people assume will get cut.
But they have a very rich parent company, the source of the tender offer, so it might not.

Jim
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So BPY closed at $10.97 today ($11.05 after hours) which is down about 25c from Jim's post July 2 . I am wondering what I am missing.

Without the $12 tender offer I assume the 12% dividend yield is high because people consider the $1.33 dividend is at risk. With the tender offer it seems to me that BPY Management is implying the dividend is not at risk. If the dividend is going to be cut, the stock will drop and the tender could be made later at a lower price after the cut. Or is there another part to the story?

Thinking about purchasing more BPY and offering to the tender but it seems too easy. The dividend should be announced in the next few weeks and the tender offer closes the end of August.

Craig
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So BPY closed at $10.97 today ($11.05 after hours) which is down about 25c from Jim's post July 2 . I am wondering what I am missing.
Without the $12 tender offer I assume the 12% dividend yield is high because people consider the
$1.33 dividend is at risk. With the tender offer it seems to me that BPY Management is implying the
dividend is not at risk. If the dividend is going to be cut, the stock will drop and the tender
could be made later at a lower price after the cut. Or is there another part to the story?


I don't think it's a matter of deciding whether the dividend is reliable or not, just more generally
whether the company is worth its current price given any change of getting into trouble in the next few years.
(If you think about it, cutting the dividend doesn't change the value of any company at all.
It's the change in business prospects that led to the necessity of a cut that changed the value of the company...and that has already happened)

I think the tender offer is good, in the sense that it won't get withdrawn or shrunk, and you really will get a prompt $12 each for successfully tendered shares.
But it has a built in limit of 74,166,670 shares of BPY, plus the separate offer for 9,166,667 shares of BPYU.
If more shares are tendered than the maximum number in the offer, each person who tenders gets only a pro-rata fraction of their shares sold at $12.

So, the math works like this:
Today's BPY stock price of $10.97 makes perfect sense if, for example
(a) the tender offer is oversubscribed by 2:1 and
(b) the stock price is expected to be $9.94 when the dust settles.
In this situation, if you bought shares at $10.97 today and immediately tendered them, you'd end up
selling half at 12 and "stuck" with half trading at $9.94, with a total average value of $10.97, the price now.
For context, the average market price in the two months prior to the tender was $10.34, so $9.94 seems a lowish expectation.

Taking BPY and BPYU together, the tender offer is for 20.7% for the float.
So 2-to-1 oversubscription would require about 41.5% of the float to be tendered. Seems like a lot, but maybe not.
Presumably, the lower the price is in the next month, the more likely it is that a large fraction of shares will be tendered.

The market might be making different assumptions about the ending price and the oversubscription ratio, but they have to be traded off against each other.
For example, a rational person expecting the offer to be 50% oversubscribed must think the price will settle around $8.91 after the tender.


Or the market isn't really thinking at all, which is always a possibility.
Many of the shares are presumably held in sector or index tracking funds wihch pay no attention to the tender offer.


Thinking about purchasing more BPY and offering to the tender but it seems too easy.

It is easy. You can definitely buy shares today for less than the current stock price, by buying them and tendering them.
You just don't know how many shares you'll end up with! Maybe none, maybe most of what you bought.
The average entry price for what remains (if any) will definitely be less than today's quote.
But really it depends mainly on what you think the shares are worth.
I think the fair value is much closer to $20 than to $10. But the price is clearly not determined by my opinion.

If you just want a small "sure win", writing an August $12.50 put option probably counts.
It's probably almost the same as buying the stock today for $10.97, but with a lower breakeven.
That contract closed yesterday at $1.817, corresponding to a breakeven of $10.68, 2.6% cheaper than buying the stock right now.
It seems highly likely the stock price won't be above $12.50 on August 21 when these contracts expire, so you'll probably get the stock assigned.
Once you have your stock at a breakeven cost of $10.68, you can decide whether to tender some or all of it before the August 28 deadline.
(allow time for your broker to do this)
If all of your stock is taken up in the tender, you've made a quick profit of 12.3%.
If half your stock is taken up in the tender, you've bought some shares at an average price of $9.36, 14.6% below today's market price.
If for some reason the stock price zooms and the puts expire worthless, you've made a 17% profit in 42 days on your cash conditionally committed.

Jim
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