CBS Corp (CBS) – Split Off transaction – $470 opportunity

Current Price –CBS $58.45, ETM $11.20

Offer Price – $1.08 stock of ETM for $1 stock of CBS (subject to upper limit of 5.7466 ETM shares per share of CBS)

Upside – 8% or $470 for Odd Lot holders

Expiration date – November 16, 2017

This is a standard split-off transaction of which I have already posted quite a few. The most recent ones were PG/COTY and LMT/LDOS split-offs. CBS also had another split-off back in 2014. I recommend reading through those and examining share price behavior during and after the tender to familiarize yourselves with risks involved in this kind of transaction.

SEC Filling

 

Important items to consider:

  • Final exchange ratio will be determined close to the expiration of the offer (valuation dates are 10th, 13th and 14th of November 2017), 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 15th of November the exchange ratio will already be known, so one might wait till then for the trade (however the upside in the trade might be gone by then).
  • Transaction is subject to upper limit of 5.7466 ETM shares per share of CBS. At current prices the exchange ratio is at 5.64, thus already fairly close to the upper limit. If the spread widens (i.e. CBS get more expensive and ETM gets cheaper) during valuation dates, the final pay-off will be less than 8%.
  • There are no ETM shares to borrow (at least on IB) for hedging the to-be-received ETM position. Thus investors would be exposed to ETM share price fluctuations after the expiration of the tender (usually new shares are distributed within one week of the tender expiration). In some cases arbitrage on split-off transactions has worked out better without shorting (e.g. LTM/LDOS split off), but it is hard to know in advance. Approximately 72% of post split-off ETM stock will be held by current CBS shareholders so after the tender there will likely be quite a bit of selling pressure, especially keeping in mind that there is no ETM borrow at the moment.
  • Only c. 5% of the CBS shares will be exchanged in the split-off, thus CBS market price is unlikely to be effected much by this arbitrage situation – as opposed to ETM where the share price over the next month is likely to be materially affected by the arbitrageurs.
  • Both companies are expected to announce quarterly results in the beginning of November before the expiration of this transaction.


Transaction details:

For each $1.00 of CBS Class B Common Stock accepted in the exchange offer, you will receive approximately $1.08 of Radio Common Stock, subject to an upper limit of 5.7466 shares of Radio Common Stock per share of CBS Class B Common Stock. The exchange offer does not provide for a minimum exchange ratio. The value of CBS Class B Common Stock and Radio Common Stock will be determined by CBS by reference to the simple arithmetic average of the daily volume–weighted average prices on each of the Valuation Dates of CBS Class B Common Stock and Entercom Class A Common Stock on the New York Stock Exchange during a period of three consecutive trading days ending on and including the second trading day preceding the expiration date of the exchange offer period. Based on an expiration date of November 16, 2017, the Valuation Dates are expected to be November 10, 2017, November 13, 2017 and November 14, 2017.

 

No proration for Odd Lot holders:

Beneficial holders (other than plan participants in the CBS Savings Plans) of odd-lots who validly tender all of their shares will not be subject to proration if the exchange offer is oversubscribed and if CBS completes the exchange offer (those who own less than 100 shares but do not tender all of their shares will be subject to proration).

47 COMMENTS

    1. Makarid

      The only way you can play this now is buy 99 shares of CBS and tender for the split.You will get 99* final_conversion_rate of ETM shares.After that you can sell them or hold them,your choice.

      1. dt

        It is important to decide whether to buy CBS now or to wait till valuation days when the exchange ratio and upside will be known.

        If I recall previous split-off transactions correctly, then in most/all of them buying stock in advance resulted in higher returns (but in all the previous ones I was able to hedge, whereas that is not possible now).

        I do not have the position yet.

  1. David Flynn

    Now that CBS has declined after it’s earnings report and is currently trading at approx. 55.50/share; would you buy the 99 shares of CBS or still wait?

    Thank you

  2. Noah Kauffman

    Do you have an estimate on how many shares would be selling out of ETM post the deal? Just want to see if I can get a handle on the predicted transaction cost of shares coming into the market. Seems like you would need to sell upwards of 20m of shares to get impact of 8%. How many shakes do you think will hit the market following the deal?

    1. dt

      Your guess is as good as mine. Although there clearly should be some selling pressure as 72% of all ETM shares will be owned by current CBS shareholders. However, the examples of previous split-offs (e.g. check LDOS performance) show that this does not necessarily mean that ETM will drift downwards after the transaction. It’s already heavily shorted by arbitrageurs and potentially undervalued.

  3. Makarid

    The fee for borrowing ETM shares is 32% per annum,which is extremlt expensive.Does that mean that every person that has short the shares will pay this fee or that the new players that want to short the share will pay this fee?Thanks!

    1. dt

      This is the borrow fee that all the retail investors have to pay on IB regardless if he/she is shorting now or has shorted when the borrow was cheaper. Other brokers might have different borrow fees and institutional investors might have access to cheaper borrow.

      1. Makarid

        Thanks for clarifing that! So if someone has short the stock from August and let’s say that the fee is 20%,he must have payed 5% of his short position on fees.I am not sure but i remember that the borrowing fee was at least 8% on May.This is a very expensive short even if the insitutions have much less borrowing fees.

  4. Russell Newsom

    dt – just curious, have you initiated a position? If not, do you intend to next week? Thank you for your always helpful insights.

      1. thinleyw

        FYI The borrow is pretty high at 18.16% and was actually 32% a few days ago.

        1. dt

          I have position for 99 share only, as I expect non-odd lot tenders to be prorated.
          Regarding large borrow fee – this would need to be paid only for 2 weeks. So overall the cost of borrow will be <1%.

  5. Ralf Eckey

    Borrow is unavailable at IB for ETM. Given the volatility of ETM, not sure the risk/reward is balanced.

    It’s almost decision-time.

    dt – what date is the conversion taking place? i.e. when would we see the ETM stock hit our IB accounts?

    Also, what short position did you take? 570 shares?

  6. dt

    I have 569 shares short (I based this on the upper limit). With only one day of valuation left the pricing will be very close to the upper limit.

    I am not too concerned about the forced buy-in and even if it happens, I can easily close out the CBS leg and fully exit the position. There will clearly be no short squeeze with looming increase in ETM float.

    Newly issued ETM shares should reach accounts by the end of next week (it usually takes c. 1 week after transaction expiration).

    Now the question is obviously whether this transaction could work with no hedging – i.e. would ETM share price drop less than 8% in 1-2 weeks after the expiration of the transaction? I have no crystal ball to answer this but couple points worth noting:
    - CBS/ETM transaction was known already for a few months and stock traded at $10+ for most of the summer and at $11 right after transaction details were announced.
    - ETM is already heavily shorted so share price is likely to be depressed.
    - There should not be a lot of forced selling after the deal if the tender is oversubscribed (which is likely to be the case). This would mean that only those CBS shareholders who want to get ETM stock will actually receive it. If tender is undersubscribed and ETM stock would get distributed on pro-rata basis to all shareholders the dynamics would be different.
    - Current ETM share price volatility is simply reflection of CBS share price movements rather than indication of investor sentiment towards the company. The cheaper ETM gets now, the more likely it is that the unhedged participation in CBS tender and subsequent sale of newly received shares would end up being profitable.

    1. Vincent Tiesinga

      The hardest part I think is how to weigh these arguments to come to a conclusion about the absolute supply/demand balance. I think the fact that there are no shares available for borrow on IB, and the high borrow rate, indicates there is still a lot more demand for selling than is available right now. At least on IB, apparently a lot of people want to sell more shares than currently available. Those people are very likely to to sell as soon as they get their shares of ETM. In contrast to people who want to buy ETM, they can just buy them now, especially if the price is already lower compared to when the deal was announced. On the other hand, this reasoning assumes that IB is representative for the behavior of all shareholders and you are still 8% ahead from the start. If the share price only drops 5%, you still make 3% profit. Personally for me it’s too hard to figure this out, which keeps me from buying CBS unhedged, even though I really want to pick up a quick $450 in one week :)

      1. Vincent

        Since the borrow is unavailable I bought put options ETM instead, as hedge for the 99 shares CBS. This give a minimum profit of around $250 in my case plus an option to profit from share price volatility. A nice second best way to still take advantage of this idea I think.

  7. Ralf Eckey

    Vincent, one way to hedge is through options. eg sell $9 Dec 17 Call option for $1.55 (thereby locking in a ETM price of $10.55 – so long as ETM stays >$9 through mid-dec).

    This means you effectively increase the holding period a fair whack – 1 weeks turns to 1 month, but you’re hedged, and you get your $450 through the gates.

    There is enough liquidity in the options market to execute these trades. I just dipped my toe in, and found a counterpart.

    1. Vincent

      Thanks Ralf, I was thinking of that later as well. I eventually hedged by buying put options instead of writing call options as you suggested. Same idea, just a bit different pay-off structure.

  8. dt

    Exchange ratio has been set at 5.6796. At yesterday’s closing prices odd-lot pay off stands at 10.7% or $600.

    1. Eli Schwab

      Yes most brokers will allow you to buy and tender up until the expiration date but some have their own deadlines after which all tender orders are on a best effort basis.

  9. Dan T

    ETM continues to rise, its up another 5-6% this morning. Any thoughts on why this is happening?

    1. dt

      Number of possible explanations:
      1. Proration ended up being very low (10%) and arbitrageurs are unwinding their excess ETM short positions;
      2. Selling pressure subsided with expiration of tender;
      3. Investors consider ETM to be generally undervalued at current prices, which were depressed due to split-off transaction.
      4. Random market moves

    1. RJChicago

      How can you determine the amount of odd-lot accounts from the filing? Thank you.

      1. dt

        Just calculated how many shares need to be purchased on priority basis in order to achieve 10.12% proration for the remaining shares.

    1. dt

      We need to wait before newly issued ETM shares hit the market (likely by the end of next week), but if the prices remain at current levels, then unhedged trade would end up much more profitable.

      1. Ralf Eckey

        Even though I bought 99 shares, IB doesn’t seem to be treating this as an odd-lot conversion. Anyone else seeing odd conversion figures in their IB account?

        1. Chuck Tanner

          I called Fidelity and they did the “paperwork” automatically. I wasn’t thinking for some reason and I should have loaded these into my kids accounts also.

  10. Vincent

    I can see the receivable tickers in my IB account already. But the amount is calculated as if the proration is going to be applied, despite that I bought and tendered an odd-lot. Hope this will be corrected later.

    1. thinleyw

      From IB:

      “Please be aware that the current positions reflected in your account under the symbols ETM.REC and CBS.REC represent interim processing of the voluntary offer to exchange CBS Corp – Class B Non Voting shares.

      The current processing reflects an election for a non-odd lot holder, meaning the positions represent the expected pro-ration for elections.

      IB is aware that you had submitted your election as an odd lot. Please know that upon final allocation of the new ETM shares, your account will be adjusted to reflect your odd lot election.

      IB apologizes for any inconvenience. “

  11. Makarid

    I have receive my ETM shares today.I am still seeing that the short interest rate is huge 35%.Does that mean that many shareholders that will receive ETM shares from the exchange offer,haven’t receive them yet? Thanks

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