Thursday, 3 July 2014

The Oi PT merger and the price collapse

This merger is getting much more interesting than I expected in the beggining.

As mentioned on precious posts, I never entered the arbitrage situation but I did point out to the price gap getting thinner on the following week suggesting a closing of the arbitrage. But this is also a case to remind us that the most unexpected sometimes happens. The good news is that the arbitrage implied going short PT and long Oi common ADR and that the gap actually reduced a lot and might even invert (if it hasn't yet, I'm not going to the the calculation here - it is fairly easy to do and was already exemplified on the initial post). But let's go back a little:

So we had a situation of a merger where the terms had been settled and there seemed to be no way it was going to be canceled. A price gap of 18% allowed a decent arbitrage situation. But some months latter we find out that previously to the settlement PT administration decided to lend 897M€ to a shareholder (or related parties to that shareholder, it isn't important) in financial distress. It was a short term loan but (as it happens when you are in financial distress-- Don't go into debt) it is currently seeming likely that those shareholders will not be able to pay back on time (and even to pay back the full amount ever).

Since 897M€ is a decent amount of money to PT this might be a gamechanger. It seems likely that the merger will happen anyway but it also seems likely that (if PT isn't paid back in full in due time) the terms will be changed and maybe PT shareholders will receive a worse ratio than expected. Oi shareholders would get less diluted, PT's management image gets a "little" burned (and so easier to substitute), Corpco would have "some" millions less (and would have to find a way around it, which is hard for a leveraged company), but still the merger will probably go through. All this led to a price collapse of both PT and Oi, bigger on the PT side.

Anyway, the arbitrage situation, despite having been profitable should be turned off until new information arrives even if the gap re-opens. It could happen that everything stayed the same and this was just a lump but it seems wise to recalculate the odds.

Disclaimer: no positions for the moment, I have no idea if I will do something about this all situation at the moment. Most of the things  I write on this post are just a rationalization attempt and it is perfectly possible that I am wrong - do your own research. This isn't an investment advice (it never is - read the introduction post).

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