Tuesday, September 05, 2017

Rockwell Collins & Kite Pharma Update

I sold my shares in Rockwell Collins (Ticker: COL) this morning generating a net gain of ~1.5% over a 7 day period. The equity component of this transaction was higher than what I had expected. I didn’t want to hang around to the end with this one.

Gilead’s (Ticker: GILD) transaction of Kite Pharma (Ticker: KITE) appears to be ahead of schedule. Gilead commenced the tender offer today with the tender expiring on October 2nd. I sold some more Puts today.

26 Comments:

At September 05, 2017, Anonymous Anonymous said...

All,

WOW rough day at the office (stock market) today. Nice job with gain on COL. Quick turnover for you. Todays headwinds were day after a holiday, hurricane Harvey/Irma events, little KIM (SOKO) acting up and the street did not care much for UTX / COL deal. Its looks like UTX stock price brought down COL. It stil may have moe decline to go. Well I sold ITM money calls (SEP 130's) against my common to try and squeeze out some extra profit and lower the cost basis. We will see if common gets called away on 9-15-17. If not we will work on plan B to exit COL common. My gain on COL common will be 9.59% but put insurance ate most of that gain up. I have to revise my plan for future put insurance.

As far as KITE naked puts, they would lower my portfolio buying power so I have to explore another approach.

I have been conducting due diligence on NXPI and will share thoughts and approach soon.


Regards,

Inforesource7

 
At September 06, 2017, Anonymous mergerpie.com said...

nice, i wasn't confident enough to enter COL. big regulatory issues with the merger

 
At September 09, 2017, Anonymous Anonymous said...

All,

Pending Tender Offer to Shareholders of NXPI by QCOM

I have conducted some due diligence on the NXPI by QCOM pending tender offer for $110 in cash at a 35.14% premium. I went back and read the SEC 14D-9 background of purchase agreement. QCOM originally approached NXPI about an acquisition. QCOM's business depends primarily on smart phone sales. NXPI produces various chips for automobiles / trucks, including autonomous (self driving Technology). QCOM needs to diverse its business to survive longer term. The NXPI management during deal negotiations seem very wiling to get married to QCOM even if it meant not pushing for a maximum price at the time. The current tender offer process has been extended numerous times. This may be mostly due to numerous CFIUS approvals that are required from several foreign countries. Why would one tender shares (especially institutions) without the required approvals? What is interesting is the periodic tender offer numbers (provided in each SEC) document after each tender offer period expiration has been decreasing from a high of 17.2 to a low of 6.9% See data at bottom. I believe the required minimum tender threshold is 70%. Many in the media since the announcement have felt NXPI @ $110 / $38.06B (excluding debt) is under valued. In fact some big name Hedge Funds in Elliott Management and Third Point have accumulated large share positions for leverage and encourage NXPI to re-negotiate for a higher price. As a result of these Hedge Funds, the current NXPI stock price is +2.09 over the tender offer @ $112.30. Do you think other large holders will except $110.00 and tender there shares after all CFIUS approvals have been rendered? I doubt it. How much additional money should NXPI seek?

Reading the SEC 14D-9, there was mention of, the offer consideration was $2.25 less than NXPI's all time high closing price of $112.25 on May 29,2015. $112.25 would have added only $778M to the deal. What did NXPI management buckle on this extra money for Shareholders?

QCOM is obligated to pay a $2B breakup fee / 346m outstanding shares = $5.78 per NXPI share.

Some in the media have suggested a few different increased tender offers:

$115.00 / + $4.55% / +$1.73B (-13.5% lower than breakup fee)
$120.00 / + 9.09% / + $3.46B. (+73% over break up fee)
$125.00 / + 13.64% / + $5.19 B.(+159.5% over break up fee)

Take a look at the option volumes and premiums for those strikes. Millions of dollars are being spent / sold in anticipation of a potential increased tender offer price by QCOM. There are many ways to arbitrage this deal.

Go long stock at current levels. Can you say there is an automatic Put at $110 / - 2.09% loss (current QCOM tender offer)?

Take a covered Call position and sell Call Leaps @ $115.00 / $120.00 / $130.00 to recoup price gap between $110.00 and current stock price and add potential profit if Call is ever exercised, falls in between or expires worthless.

A Money Turtle favorite, Sell $110.00 naked Puts while we wait for CFIUS approvals and any revised higher tender offer.

Latest projections for remaining CFIUS approvals may be December 2017 / January 2018. This a highly unusual set of circumstances for an announced deal that includes multiple aspects of pressure for QCOM to raise its tender offer. The question is not if they will raise, but how much will they raise to win over large institutional investors and two large activist Hedge Funds expecting no less?

NXPI tender offer share count updates:

next reporting date September 22
August 23 23.4 million 6.9%
July 27 25.6 million 7.6%
June 28 42.2 million 12.5%
June 1 47.7 million 14.1%
May 50.3 million 14.9%
April 54.8 million 16.3%
March 58.0 million 17.2%
February 49.6 million 14.8%


This write up was longer than I anticipated but more consolidated facts are better than less.

What are your thoughts? What are the Pros and cons that you see that I may have missed?


Disclaimer: I hold JAN 2019 $120 covered Call options in NXPI.


Regards,

Inforesource7

 
At September 12, 2017, Blogger Money Turtle said...

NXPI: The market is clearly expecting a price bump from Qualcomm to get the NXPI deal done. NXPI is trading cheap right now (in almost all metrics: P/S, P/B, P/E, etc...) compared to its industry peers. I would say that Qualcomm needs to bump the price 5-10% to get this deal done. Like you said, there are so many ways to play this. I guess it depends on your risk profile. You're right, I would consider selling some long dated puts.

That was a nice piece of analysis!

 
At September 12, 2017, Anonymous Anonymous said...

MT,

Why Thank You. I was beginning to wonder if my write up was way too much for the blog here as most comments are brief and get right too the point and that is OK. Maybe readers need to take some time and digest whats presented. As far as NXPI I have never seen such an ideal setup for a price increase. Is it possibly too good to be true? The Shareholders big and small hold all of the cards. Tender or not to tender. The next date to watch is Friday 9-22-17 as the next tender offer expiration date. My guess is if the percentage tendered is the same or even less than August the stock price may pop and then settled down again. If the percentage goes up some will get spooked and may sell. The NXPI stock price offers good daily trading ranges where if you bought too high (ie. $113) for your liking you can average down around lower $112 some and when it cycles back up trim the extra shares to maintain the position you are comfortable with. The other observation is the option open interest (liquidity) for some far out high premium Call and Put strikes is fantastic. Liquidity and narrow bid ask spreads are an option traders very best friend.


Regards,

Inforesource7

 
At September 13, 2017, Anonymous mergerpie said...

i didn't read the tender docs but where does the breakup fee comes in? will a failure to win enough shares during the tender trigger the breakup fee?

 
At September 13, 2017, Anonymous Anonymous said...

Mergerpie,

Yes, I believe so. I copied the following language from the NXPI SEC sched14d9 dated 11-18-16.

page 23
From October 24, 2016 to October 26, 2016, representatives of the Company’s management, Skadden and De Brauw had meetings with representatives of Parent’s management and Paul Weiss at the New York offices of Skadden to negotiate the remaining outstanding issues between the parties and finalize the Purchase Agreement and other transaction documents. As a result of these negotiations, it was agreed, among other things, that (i) Buyer would be the acquiring party, subject to the terms of the Letter Agreement between Parent and Buyer and the Dutch Pledge Agreement and the U.S. Pledge Agreement whereby Buyer would, in accordance with the terms thereof, pledge to the Company its rights to enforce the Letter Agreement against Parent, (ii) the Company would pay termination compensation of $1,250,000,000 if the Company terminated the Purchase Agreement to enter into a superior proposal and other customary circumstances, (iii) Buyer would pay termination compensation of $2,000,000,000 if the Purchase Agreement was terminated due to the failure to obtain regulatory approvals or the failure to materially complete the Internal Reorganization and (iv) Buyer would obtain a letter of credit for the same amount in favor of the Company within 30 days from the date of the Purchase Agreement.

page 26
Minimum Condition; Terms of the Offer. The NXP Board also considered the other terms of the Offer, including the fact that the Offer is conditioned on the Minimum Condition and the fact that Buyer may not, without the consent of the Company, waive or change the Minimum Condition or change the terms of the Offer (except as provided in the Purchase Agreement) in a manner that (i) decreases the Offer Consideration, (ii) changes the form of consideration to be paid in the Offer, (iii) decreases the number of Shares sought in the Offer, (iv) extends or otherwise changes the Expiration Time (except as provided in the Purchase Agreement) or (v) imposes additional conditions to the Offer or otherwise amends, modifies or supplements the Offer in a manner adverse to the Company’s shareholders. The NXP Board also considered that if the Company’s shareholders at the EGM approve certain resolutions related to the Asset Sale and the Second Step Transaction, the Minimum Condition will be deemed to be a reference to 80% and that Buyer, with NXP’s prior written consent (which will not be unreasonably withheld, conditioned or delayed), may at any time lower the Minimum Condition from 95% to a percentage not less than 70%, both of which have the effect of increasing certainty of completing the Offer.

https://www.sec.gov/Archives/edgar/data/1413447/000119312516771503/d278388dsc14d9.htm


Regards,

Inforesource7

 
At September 14, 2017, Anonymous mergerpie said...

Dear Inforesource7,

I read the tender offer and it seemed like based on this section: "Reverse Termination Compensation. The NXP Board considered the requirement under the Purchase Agreement that, in the event that the Offer fails to be consummated under specified circumstances, particularly circumstances relating to the failure to obtain antitrust approvals or failure to complete in all material respects the Internal Reorganization, Buyer will pay to the Company termination compensation of $2,000,000,000 in cash.",

the failure to obtain the necessary NXPI shareholder approval will not trigger the payment of the termination fees of $2B.

If the reverse is true, it will be the first time where i had seen this kind of clause which is very unkind to the buyer and a massive incentive for shareholders not to approve for the $110 price. It is also a self defeating clause for the buyer. I believe failure to obtain NXPI shareholder approval should not trigger the termination payment from Qualcomm to NXPI.


 
At September 14, 2017, Anonymous Anonymous said...

All,

NXPI trading observation today. Alot of zig zag up and down today but not much range, only .43. I did not read any news but I believe a Bloomberg video of QCOM Chair Jacobs comments on pending acquisition may have pushed the buttons of some traders. Note how Jacobs describes NXPI real value to QCOM, broad number of customer base versus QCOM customer base. Lets hope the activists are accumulating more shares to gain leverage and help force a price increase.

https://finance.yahoo.com/video/jacobs-says-qualcomm-paying-fair-201242633.html

I also noticed large call activity APR 2018 $105 Calls 2,343; APR $110 2,343; JAN 2019 $115 5,000 contracts (500,000 share equivalent). All option activity is robust.

MT, how are things going with KITE? The 50 day average share volume keeps increasing everyday. Can you draw any inferences to a continuing outstanding share count reduction due to the ongoing tendering of shares?

Mergerpie, we appreciate your astute opinion about the QCOM reverse termination compensation structure. The banks and financial advisors involved on both sides certainly have all of the angles covered. I guess I will shelve my argument about NXPI potentially receiving $5.78 per share from QCOM in case stockholders do not tender more than the 70% threshold. I will offer more stimulating thoughts on this in my next post here.

Does anyone have an opinion on why BRCM declined yesterday? Do you think it could have been elated to Pres. Trump's decision to prevent Lattice deal or other reason?


Regards,

Inforesource7

 
At September 14, 2017, Anonymous mergerpie.com said...

Dear Inforesource,

I happened to be invested in $BRCM. The main issue with $BRCM is CFIUS and the lack of news regarding this aspect. CFIUS is the last approval needed to complete the merger. Take note in the DEFM14A that 1st Nov is the last date where either party can delay the merger. After that i believe any extension if any needs the approval of both parties. CFIUS is taking a long time due to lack of manpower but i believe approval is again a matter of time, not if...

Avago, the company that bought Broadcom and now Brocade, is a Singapore registered company but majority owned by funds, not by individuals or governments. The board of directors have a good mix of U.S citizens so i don't foresee any implications with CFIUS.

I attribute the drop mainly to the incoming deadline and uncertainty if the merger can complete by nov 1.

 
At September 14, 2017, Anonymous mergerpie.com said...

Last month cabela's was trading up to 15% discount due to FRB approval timeline uncertainty. The lattice transaction was a 100% no-go due to the heavy chinese govt hand in the buyer and its already priced in..the share price barely dropped on the announcement. Traders don't like uncertainty so continue to expect $BRCD to be under pressure. btw the CFIUS decision is expected in early oct.

 
At September 15, 2017, Anonymous Anonymous said...

Mergerpie,

Thank You for the update on BRCM.

If for some reason a strategic buyer decided to make a higher competing bid and QCOM threw in the towel, NXPI or the new buyer would have to fork over a $1.5B break up fee to QCOM. I calculate that to be approx. $1.5B / 346m outstanding shares = $4.34 per share. This may be one reason why there is so much Call option activity centered around the $115 strike price (all series). $110 + $4.34 would be the starting counter bid. QCOM will not let that happen. They most likely know that QCOM is the best fit for NXPI.

Acquisition by tender offer can be faster to close but more costly in the sense that the buyer has higher financial / legal costs and may have to offer a higher premium for a host of reasons. QCOM offered NXPI a 35% premium which is right around average. Given the fact that QCOM has had to seek a long list of international regulatory approvals: U.S., Taiwan, EU, China, Japan, S. Korea, Phillipines and obtain stockholder tendered shares of 70.01% or more, did they really think the process would be any faster than a standard merger process? Did they consider the completion time risk may have a such an influence on the low percentage of tendered shares? Yes, we understand most stockholders wait until all approvals are obtained before tendering shares. Why do you think that QCOM decided to choose the tender offer process versus the standard merger process?


Regards,

Inforesource7

 
At September 15, 2017, Anonymous mergerpie said...

I don't have a fixed theory. I think the advantage of a tender offer would be the increase flexibility rather than a single shareholder vote at a fixed date. I seen quite a number of
big mergers involving targets from Europe being acquired in tender offers rather than merger process. Maybe the shareholding classes in Europe are more complex and the difficulty in getting all the shareholders to vote for the acquirer. A tender offer gives the acquirer more insight to whether the offer will succeed or need to increase the price.

 
At September 17, 2017, Anonymous Anonymous said...

MT,

Do you recall the acquisition deal that took the shortest time to complete? I recently learned it was the acquisition of Human Genome Sciences by GlaxoSmithKline (NYSE:GSK). It took just 18 days for this deal to complete on August 3, 2012.

Do you think KITE could be on the same track?


Regards,

Inforesource7

 
At September 17, 2017, Anonymous Anonymous said...

HSR approval takes 15 days for cash deal. Unless they get the approval before announcing the deal to public, not sure how they can move that fast.

 
At September 17, 2017, Anonymous Anonymous said...

Anonymous,

Yes, we understand the current HSR approval. I was hoping MT or others had some recollections of the HGSI / GSK deal to shed light on the 18 day closing record or whether it may not be true. What I meant with KITE is does it seem like it is along the same speed track working within currently established approval timelines. MT understands the pharma/biotech/health sciences players very well. Thanks.


Regards,

Inforesource7

 
At September 17, 2017, Anonymous Anonymous said...

And MT understands beer and wine very well too.. STZ
Only similarity with kite I see was MDVN/PFE last year, was announced almost same time and deal closed in late sept/ early oct.
That was a 14b deal too

 
At September 17, 2017, Anonymous Anonymous said...

Anonymous,

Thanks for the information on MDVN/PFE. Yes your time frame and price ($14B) is just about right. I went back and the announce date was 8-22-16 and the closing was 9-28-16, 37 days.

I also went back and looked at HGSI/GSK deal in 2012. That was longer than 18 day process (I will let my news source know) with several twists. Too long to detail here but HGSI was going through strategic review/auction process and GSK got fed up and decided to launch an unfriendly tender offer for $13.00 At some point cooler heads prevailed and HGSI agreed to a bump to $14.50 which closed sometime in Sep 2012.


Regards,

Inforesource7

 
At September 17, 2017, Anonymous Anonymous said...

MT and I were in MDVN, actually I was 100% in the stock at that time since there were reports of multiple parties involved. SNY even got HSR approval in July, and if SNY would have previled then MDVN might have closed even in lesser time

 
At September 17, 2017, Blogger Money Turtle said...

I would use MDVN and ARIA tender offer models for KITE. The HSR expiration date for the acquisition of KITE by GILD is September 25th with the tender offer expiration of October 2nd. Everything is on track for this deal to close after the expiration of the tender offer (this works out to 37 days from deal announcement to closure).

ARIA: Definitive agreement to be acquired by Takeda on January 19th via tender offer. Deal closed on February 16th, which took a total of 39 days from deal announcement to closure.

HGSI / GSK: I did not play that one and not in tune with the specific details.

 
At September 18, 2017, Anonymous Anonymous said...

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At September 19, 2017, Anonymous Anonymous said...

Will all the KITE leaps expire in oct Or nov OPEX

 
At September 19, 2017, Blogger Money Turtle said...

KITE: The options should accelerate to Oct expiration, but it's a call made by the OCC. I've seen deals close early in the month and they accelerate the options for the next month. And deals that close a few days prior to options expiration and they accelerate the option expiration to the same month. I don't know how they make this determination.

 
At September 20, 2017, Anonymous Anonymous said...

All,


This section of the OCC web site may help take the mystery out of learning about future dates / planning for options acceleration, etc. Most notices do not provide much lead time but thats OK. We like efficiency and Speed !!


https://www.theocc.com/webapps/infomemos


Regards,

Inforesource7

 
At September 20, 2017, Anonymous Anonymous said...

MT,

What do you know about LDR being acquired by FTV from a business point of view since it appears to be somewhat related to your knowledge of the health related industry? Good fit, bad fit, any potential competitors thinking about upping FTV offer? If so, who could it be?

Landauer is a leading global provider of technical and analytical services to determine occupational and environmental radiation exposure, as well as the leading domestic provider of outsourced medical physics services. For more than 50 years, the Company has provided complete radiation dosimetry services to hospitals, medical and dental offices, universities, national laboratories, nuclear facilities and other industries in which radiation poses a potential threat to employees. Landauer’s services include the manufacture of various types of radiation detection monitors, the distribution and collection of the monitors to and from customers, and the analysis and reporting of exposure findings. The Company provides its dosimetry services to approximately 1.8 million individuals globally. In addition, through its Medical Physics segment, the Company provides therapeutic and imaging physics services to the medical physics community. For information about Landauer, please visit their website at http://www.landauer.com.


Regards,

Inforesource7

 
At September 20, 2017, Blogger Money Turtle said...

LDR / FTV: Yes, I do find this as a strange acquisition by FTV. LDR is a slow / almost non growth biz that specialize in radiation detection. LDR does have a nice moat as there is a strong recurring revenue / cash flow. Anyone that works with radiation wears a detection badge, which is mailed to LDR on a monthly basis for results. They essentially dominate this biz. I don't see any synergies in this acquisition by FTV. A really new type of business for them.

 

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