Procter & Gamble (PG) – Exchange Transaction – $650 upside

Current Price –PG $88.31, COTY $25.99;

Offer Price – $1.075 stock of COTY for $1 stock of PG (subject to upper limit of 3.9033 COTY shares per share of PG);

Upside – 7.5% or $650 for Odd Lot holders;

Expiration date – September 29, 2016;

Odd Lot holders of PG (less than 100 shares) are not subject to proration;

SEC Filling

 

Important items to consider:

- Final exchange ratio will be determined close to the expiration of the offer (valuation dates are 23rd, 26th and 27th of September 2016), therefore final payoff/loss might differ from the indicated one and depending on how shares move in the meantime this transaction might even result in losses for investors. On 28th of September the exchange ratio will already be known, so one might wait till then for the trade.

- To hedge the risk of COTY share price fluctuations, one might consider shorting COTY. Borrow fee at the moment stands at 13% annually.

- This deal is more risky than the standard odd lot tenders usually posted on this site. Do your own due diligence before investing.

Transaction details:

The transactions are being undertaken to transfer certain assets and liabilities relating to P&G’s global fine fragrances, salon professional, cosmetics and retail hair color businesses, along with select hair styling brands, to Coty. As promptly as practicable following completion of the exchange offer Green Acquisition Sub Inc., a wholly owned subsidiary of Coty, will merge with and into Galleria Company, with Galleria Company surviving the merger and becoming a wholly owned subsidiary of Coty. Pursuant to the Merger, each share of Galleria Company common stock will automatically convert into the right to receive one fully paid and non-assessable share of class A common stock, par value $0.01 per share, of Coty.

For each $1.00 of P&G common stock accepted in the exchange offer, you will receive approximately $1.075 of shares of Galleria Company common stock, based on the Average P&G Stock Price and the Average Coty Stock Price determined by P&G on valuation dates and subject to an upper limit of 3.9033 shares of Galleria Company common stock per share of P&G common stock. If the upper limit is in effect, you will receive less than $1.075 of shares of Galleria Company common stock for each $1.00 of P&G common stock that you tender, and you could receive much less.

The Average P&G Stock Price and the Average Coty Stock Price will be determined by P&G by reference to the simple arithmetic average of the daily volume-weighted average prices (“VWAPs”) of shares of P&G common stock and shares of Coty common stock on the New York Stock Exchange (“NYSE”) during a period of three consecutive trading days (currently expected to be September 23, 2016, September 26, 2016 and September 27, 2016) ending on and including the second trading day preceding the Expiration Date.

 

No proration for Odd Lot holders:

Beneficial holders (other than plan participants in a P&G U.S. benefit plan) of fewer than 100 shares of P&G common stock who validly tender all of their shares will not be subject to proration if the exchange offer is oversubscribed.

 

 

12 COMMENTS

  1. Gabriele

    P&G is the first situation I wanna participate and i read very well your article and also had a look at the sec info. Just being my first one i would like you to provide a little bit more info like:
    - buying p&g (99 shares) and shorting coty (386 shares which is 99 times the upper exchange ratio) give me the 7.5 percent profit whatever it happens to shares from here to the due date?
    -what is the best and the worst case scenarios in terms of how the shares could move if i buy p&g now without shorting coty? I have some difficult to understand why if the upper limit is exercised the profit would be less than 7.5 percent.

    I hope my questions are not too boring, i am just learning!!

    1. dt

      There are two main risks with PG exchange offer. Firstly the exchange ratio will only be set by the end of September, so you do not know in advance how many shares of COTY you will get for each share of PG – in some scenarios (e.g. final exchange ratio being lower than the ratio you shorted at) you will realize less than 7.5% (as you would get less COTY shares than your short position). You can run some simple modelling on excel with different prices for PG and COTY to see how this works out. I believe there are also some examples in the tender SEC filling linked above.

      The second risk is availability of COTY short, which is really tight now and could easily cause forced buybacks of short positions.

      Hope this helps.

      1. Gabriele

        Hi, and thanks for the reply.
        So in your opinion what would be the best strategy to profit from the transaction:
        1)waiting until the 28th to buy P&G and then tender them once the exchange ratio is known (without shorting Coty)
        2)Having the possibility to short Coty now and having P&G shares would allow me to lock the profit, whatever happens to the shares in the meantime?

        Thanks

        1. dt

          The best option would be to short now and then actively manage the short position depending on movement of the share prices. But again borrow is tight and forced buyback calls are likely.
          Tendering P&G shares without shorting Coty would be risky, although in LMT/LDOS offer tendering without shorting resulted in 2x higher profits. But I doubt this will be the case for PG/COTY, as free float of COTY will increase dramatically, which I expect to have strong downwards pressure on the price.
          Another possibility is to hedge via put options, but these cost c. 5%, meaning that the return from the transaction is reduced to 2.5%.

  2. Phi

    You state that there is no proration for Odd Lot holders:

    “Beneficial holders (other than plan participants in a P&G U.S. benefit plan) of fewer than 100 shares of P&G common stock who validly tender all of their shares will not be subject to proration if the exchange offer is oversubscribed.
    Except as otherwise provided in this section, beneficial holders (other than plan participants in a P&G U.S. benefit plan) of fewer than 100 shares of P&G common stock who validly tender all of their shares will not be subject to proration if the exchange offer is oversubscribed. Beneficial holders of more than 100 shares of P&G common stock are not eligible for this preference.”

    but the SEC filing says:

    Except as otherwise provided in this section, beneficial holders (other than plan participants in a P&G U.S. benefit plan) of fewer than 100 shares of P&G common stock who validly tender all of their shares will not be subject to proration if the exchange offer is oversubscribed. Beneficial holders of more than 100 shares of P&G common stock are not eligible for this preference.

    Your comment above is only for oversubscribed cases. Judging by your statement of “no proration for Odd Lot holders” you’re assuming that it will be oversubscribed. Can you identify how often these are oversubscribed? I assume most of the time?

    1. dt

      I think you are missing the point – if the offer is not oversubscribed then all the shares tendered will be accepted, does not matter whether it is odd lot or not. Proration applies only when the offers are oversubscribed.

      And to your question on how often the answer is that almost always.

      Btw, proration factor for PG tender has been already announced – 15% (except for odd lot holders, who have 100% of their shares accepted).

      1. d s

        how long does it take for the tender to convert to COTY?

        1. dt

          It is usually about a week from the expiration date. The exact timing depends on your broker.

  3. d s

    Also just wondering, I dont check up on this site often, will we be emailed if you have a new offer idea? thanks

    1. dt

      All subscribers get e-mails whenever a new idea is posted.

Comments are closed.