Current Price – $102
Tender Price – $99 – $114
Upside – 12% or $1200
Expiration Date – 29th of May 2018
No proration for odd lot holders
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.
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.