AbbVie (ABBV) – Odd Lot Tender – $1200 upside or guaranteed $75

Current Price – $102

Tender Price – $99 – $114

Upside – 12% or $1200 (if tender is priced at the upper limit)

Expiration Date – 29th of May 2018

No proration for odd lot holders

SEC Filling

 

The write-up below was shared by Alex and few other members shared notifications (thank you all).

 

Similar idea to Whirlpool and CIT Group as it trades close to the lower limit. This could either be a classic odd lot tender with potential upside of $1200 or an option strategy with guaranteed upfront payout of $75.

AbbVie announced Dutch tender to purchase up to $7.5 billion of its common stock at $99 – $114 per share. This is part of Abbvie’s $10bn buyback plan announced in February. The stock was trading just under $114 at this time.

Since this is a relatively small tender (4.1%-4.8% of the outstanding shares) it is likely to be oversubscribed and therefore priced at current market prices or close to the lower limit. Shares are already up 11% compared to unaffected levels on April 25th ($92/share) when the tender intentions were first disclosed. Also index funds + mutual fund manager Capital Group are the main shareholders of the company and will likely tender proportional amount of shares in order to keep the relative allocations unchanged.

However, there are few potential arguments in favor of higher tender pricing:

  • Shares have traded down from recent highs of $114;
  • ABBV beat revenue and earnings estimates and increased its guidance on the 26th of April.
  • There is additional $2.5bn of buyback allotment left.
  • Stock liquidity is relatively high so any parties interested in closing their ABBV positions at current prices should be able to do it in the open market during the upcoming month instead of tendering at lower prices.

 

Option Trade

Strategy is to sell put option at the lower limit (as suggested by Greg in WHR comments). If shares trade above the lower limit till the time of option expiration, then option expires worthless and option seller pockets the premium. If for some reason shares trade down below the lower limit and buyer exercises the option, then option seller ends up with long position in ABBV. By selling one share the holding is reduced to odd-lot with priority in the tender. Effectively, this results in buying shares below the lower limit (due to pocketed put premium) and then tendering.

$99 strike put for May 25th (or May 18th) will yield around $0.75/share. But bid ask spread is wide and could change quickly. One needs a round $2k as margin, which yields a nice 4% return in less than a month, while downside is limited in this blue chip by the lower limit of the tender offer.

The main risk with this option trade is the black swan event of tender cancellation (not seen over the last few years) or some kind of misunderstanding with odd-lot priority.

16 COMMENTS

  1. Thinley w

    Thanks for the idea. I’m not familiar with options, but what happens if the stock goes to $90 after you execute the options trade. Wouldnt your cost basis be $102 – $.75 = $101.25/share while only receiving $99/share, leaving you with a loss of $1.25/share?

  2. Alex15

    You only get the Shares if they drop below 99. your Cost Base in that case is 99-0,75. So 102 is not relevant for your cost base. If the stock is at 90,You can Tender 99 shares for 99

  3. Michael Bumstead

    In the event the stock really drops prior to the tender for some reason, you would of course be better off just buying the 99 shares at $90 (or whatever).

    Realistically, as long as the tender is live a big drop isn’t too likely. Of course, if they cancel the tender because of bad news of some kind, that would be very different.

  4. Rick Sanchez

    do we know when the last tender offer for ABBV was, and at what price it got done at, relative to the range?

  5. carmine la mura

    is the may 11 put at 0.75 premium? or am I missing something? is it possible tosell a put so close to expiration? thank you all

  6. greg lia

    I am showing bid of .16 ask .32 as of yesterday, 5/9 close

  7. Sax Man

    IB has not yet sent any information regarding the tender – anyone having some insights?

    1. dt

      I checked with IB on this yesterday and was told info will be sent shortly.

  8. dt

    I closed my ABBV position at $107 and will not be tendering. Remaining upside was too small to be worth the risk of tender being priced materially below the upper limit.

  9. levered up

    I closed at $106 and change this week after your sale DT but reentered today at $100 and change with a plan to tender

  10. greg lia

    Revised down to 103. They forgot about the shares submitted via guaranteed delivery. Stock getting hit hard in AH obstesibly on the revision.

  11. Random Deals

    The tender price has been adjusted down to $103 at about 98% proration.

Leave a Reply

Your email address will not be published. Required fields are marked *