A Dollar here, a Dollar there

Aug 21, 2014 22:06 UTC

Things are a little crazy in the dollar store M&A world. Back in June, Dollar General (from here, General) thought about trying to buy its rival, Family Dollar (from here, Family). For various reasons, this didn’t happen. Instead, Dollar General’s other rival, Dollar Tree (from here, Tree), submitted a bid to buy Family for $8.5 billion several days after the meetings with General. Family accepted this, even though General came back with a $9.7 billion cash offer.

“Aside from offering all cash and a bigger, 29 percent premium to Family’s undisturbed share price, General may be a better fit with Family as both companies offer goods at various prices whereas Tree sticks with items that actually sell for $1 or less,” writes Kevin Allison. And yet.

The official story is that Family’s board rejected General’s better offer because of antitrust concerns. But General isn’t too sure. In a letter dated yesterday, General says that the two companies chatted in June, General floated a tentative price, and Family seemed interested. According to the letter, “at no time during this meeting did [Family CEO Howard] Levine indicate that there was a process, that there was any urgency to act or that there were discussions with another potential buyer.” But just a few days later, Family started exclusive negotiations with Tree. According to the letter, this may have been because Levine wanted to continue to be CEO of the combined company — an offer than Tree left on the table but General did not.

That’s Carl Icahn’s theory, too. While all of this was going on (but before it was public), the activist investor announced he had a 9.4 percent stake in Family. Icahn started pushing for Family to sell itself before it came out that that was in fact what Family was trying to do. As a shareholder, though, Icahn would have preferred Family to take the larger offer from General. “At too many companies in America the hubris of the CEO, supported by a crony Board, costs shareholders billions of dollars,” he wrote in a blog post about the fiasco earlier this week. And it looks like he might be right about that. “Carl Icahn’s theory… is starting to look more credible,” writes Matt Levine.  — Shane Ferro

On to today’s links:

Must Read
“The payment of ransoms and abduction of foreigners must emerge from the shadows. It must be publicly debated” – David Rohde

America’s racial divide: Unemployment – NYT

Junior bankers get a raise! – Dealbreaker

Crime And/Or Punishment
BofA settles another mortgage investigation, this time for $16.65 billion – Reuters
Most of the BofA settlement is tax deductible – David Dayen
Wall Street should be thrilled with the government’s billion-dollar settlements – Dean Starkmen

“The hedge fund structure, a fee schedule masquerading as an asset class” – Dan McCrum

Central Banking
A semi-regular reminder on the value of the Fed giving money to people – Foreign Policy

A six-figure salary still means you’re rich – Dylan Matthews

Strangely Honest
“The cost to defeat ISIL would be very high and would require a multi-year commitment” – Brian Fishman

“Despite Ferguson’s relative poverty, fines and court fees comprise the second largest source of revenue for the city” – Alex Tabarrok

MORNING BID – A (Green) mountain of short interest

Feb 6, 2014 13:50 UTC

There’s a lot of stuff going on in the world right now, but sometimes it’s more fun to look at more provincial issues, like what promises to be the mother of all short squeezes Thursday in Green Mountain Coffee Roasters, the maker of Keurig machines which announced a big investment and partnership with Coca-Cola (y’know, the biggest beverage company in the world, which buys all the vanilla, uh, everywhere).

The most recent data from Nasdaq puts short interest in this name at 25 percent of the outstanding shares (and about 30 percent of the float) – about 37 million shares, which doesn’t come close to the record of about 51 million shares back in November 2012, but still is a lot – average volume over the past 50 days is 3.11 million shares, so at that rate it would take about a dozen days to cover all of those short bets if they threw in the towel all at once.

Which means expect a gigantic trade on Thursday; it wouldn’t be surprising to see Green Mountain as the most active issue of the day behind the usual suspects (Bank of America, the S&P 500 tracking ETF, not much else). Note: Data from Markit, which calculates its own figure on short interest, puts it at 16 percent as of Wednesday, so some shorts have covered in recent days but that’s still a lot.

The stock is one of those that’s confounded investors for a long time, the kind of short bet that’s only worked as a “rental,” as hedge fund manager Doug Kass likes to put it when he jumps in and out of a bet for a few minutes or hours. StarMine data suggests it was already overvalued, putting its intrinsic value at about $69.50 a share — a price it’s not going to see again for a while as the stock surged by more than 40 percent in after-hours action.

One of the most notable short-sellers out there, David Einhorn of Greenlight Capital, has very publicly expressed his concerns about the value of this stock, and as of October 15 the hedge fund manager was still short the shares. That’s the date of his latest communication, and per my colleague Jennifer Ablan, his people didn’t comment on a question on whether he still has a short position.

So who’s getting rich Thursday on this? Besides those who have held a long position, it’s best to look at the options market on this one. There was some notable options activity in way, way out of the money call options of Green Mountain on Wednesday – more than 4,300 contracts traded at the $95 strike for a paltry 46 cents a share when there were just 780 existing contracts before the day.

The stock was trading around $110 in after-hours trading, so let’s do the math. Those 4,300 contracts would cost very little – 4,300 multiplied by 46 cents by 100 (since one contract covers 100 shares), so about $197,800. At $110, that contract is about $15 in the money — and the premium will rise to reflect that, too, so those contracts bought at 46 cents (well, $46) turn into a cool $6.45 million. Seriously.

And there was other buying, too, in the $100, $105, and even $110 strike prices; contracts expiring next week saw new positions in deep out of the money calls, too. Can’t say anyone knew something, but it sure is fishy…

Publicis Omnipresent

Jul 29, 2013 21:38 UTC

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After announcing a proposed merger over the weekend (or, as Bloomberg refers to it, a simmering “bromance”), Publicis Omnicom is set to become the largest ad company in the world. That is, it will if it’s approved by the reported 45 separate antitrust regulators who have to sign off on the deal.  “Given the long history in advertising of growth by consolidation, the surprise was mild rather than deeply shocking,” the Economist writes of the reaction to the deal.

The “merger of equals” was first discussed by the two companies’ CEOs in Davos, and the idea solidified over the last six months. While the two company heads, Maurice Levy (Publicis) and John Wren (Omnicom), will be co-CEOs for the time being, Reuters reports that after a 30-month transition period, the company will have an American CEO, headquarters in the Netherlands, and stock listed in New York. The 71-year-old Levy will remain on the board as non-executive chairman, notes Gina Chon.

The two companies represent a number of big-name rivals, including Coke and Pepsi, McDonald’s and Taco Bell, and AT&T and Verizon, which may prove to be a problem. David Jones, head of rival agency Havas, told the Economist, “I doubt you’ll find a single client who says, ‘we wish you were bigger and we were less important to you’”.

But as advertising becomes increasingly tech and data-based, the deal could be a bet that bigger means better on the internet. Matt Yglesias argues that this merger is a response to fear of tech companies, which largely cut out the advertising middlemen through direct, targeted advertising. “The combined company wants the muscle to rival Google, which dominates digital ad buying with a 30% market share according to eMarketer (Facebook has a 5% share)”, writes Lex.

However, ad exec Dave Morgan, of Simulmedia, told Peter Kafka he doesn’t think that tech is the primary motivating factor here. “These aren’t technology companies, and you don’t get better tech development out of consolidation”, he argues. Instead, says Morgan, it’s likely about much more common reasons to merge: “The bigger they are the more they can reduce costs/redundancies and hold profit margins and manage debt cheaper”. – Shane Ferro

On to today’s links:

Heart surgery costs $1,583 in India, and $106,385 in the US – Bloomberg

New Normal
4 out of 5 US adults struggle with joblessness, near poverty or reliance on welfare in at some point in their lives – AP

Gary Shteyngart tries out Google Glass – New Yorker

Bold Ideas
When should we aid Detroit? – Felix
Why the government should rebuild and restructure Detroit – John Cassidy

How Congress can help renters – David Abromowitz

The recession’s impact on America’s prison population – Mike Konczal

Central Banking
Janet Yellen is the Fed’s most acurate economic forecaster – WSJ
Summers vs. Yellen scorecard: Who’s supporting whom? – WSJ
James Hamilton makes the case for Yellen – Econbrowser

Data Points
Oil and gas workers in Australia make an average of $163,600 a year – Economist

A diet made up entirely of artificial goo is a terrible idea – Price Plow

“Mobile payments are trying to solve a problem that doesn’t exist for most people” – NYT
Scientists create a perfect mirror – Extreme Tech

Steve Cohen finds comfort in the company of family, friends, and $2000 of fresh tuna – Matthew Goldstein

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