Tuesday, 29 April 2014

Portugal Telecom oi merger arbitrage

First of all a disclaimer: I am still doing my homework on this one and I might have got it wrong. Additionally, I do not short stocks (for the time being) so I probably will not enter this deal, at least as an arbitrage. Always read the introduction post

This deal is pretty simple but exposed to some market volatility risk. Portugal Telecom and Oi (brazilian company) are merging into a new company CorpCo. As of the 29th of April 2014 the merger details, if I understood well, were:

1 PT share =3.64 CorpCo shares+0.10€per share
"As a result of the merger, PT shareholders will receive 3.64 shares of TmarPart per each PT share. Additionally, and subject to approval by its General Meeting, PT shareholders will receive, before completion of the Business Combination, a dividend of Euro 10 cent per share." - if I understood well those TmarPart will be converted 1 for 1 into CorpCo shares... and this is where I might have gotten it wrong

1 OipreferredADR=0.9211 Corpco
1OiCommonADR= 1Corpco

So as a first sanity check we should try to find the cheaper ADR:
OiADR trades at 0.868$
OiCADR at 0.93$
the ratio being: 0.9333 (superior to 0.9211 which means the common is cheaper)

The €/USD ratio is at 1.3809

which means OiCADR trades at 0.67347€

Then 1PT=3.64 OiCADR+0.10€

PT closed at 3.01€ which means it is trading at an OICADR implied value of 0.79945€ --18.7% above current trading level.

The ratio seemed higher when I started analyzing because I had not noticed the dividend. Nevertheless, if I got the facts right (and I would appreciate feedback), we still have a decent arbitrage situation.

Links: link to the PT filling

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