Current Price –$163
Offer Price – $175
Upside – 7.53% or $1200 for Odd Lot holders
Expiration date – 9th of March, 2020
Split-off transaction of which a few have been posted on the site already (DHR/NVST, LLY/ELAN, FTV/AIMC, CBS/ETM, PG/COTY and LMT/LDOS). I recommend reading through those and examining share price behavior of involved companies during and after the tenders to familiarize yourselves with risks involved in this kind of transactions.
In short, every $100 of McKesson (MCK) stock accepted in the tender will be converted into $107.53 of Change Healthcare (CHNG) stock subject to the upper limit of 11.4086 shares of CHNG per MCK share. Tender will expire on the 9th of March 2020 and exact exchange ratio will be determined couple days before that. Odd lot tenders will be accepted on priority basis. At the moment there is some borrow (at 14% rate on IB) for CHNG stock to hedge the position. Entering the trade closer to tender expiration might turn out to be less risky and more profitable (case by case situation, so hard to determine in advance).
Important points / risks to consider (very similar to other split-offs):
- Offer will be heavily oversubscribed. As only 8% of MCK shares will be exchanged in the split-off and upside is quite significant, the offer will surely be oversubscribed. In the DHR/NVST transaction 42% of all outstanding shares were submitted in the tender and I would expect similar outcome this time. So proration will probably be around 15%-20%.
- Odd-lot holders (less than 100 shares) will be exempt from proration. This provision has never been cancelled in split-off transactions so far. But with the odd-lot plays getting more popular, the priority treatment might get eliminated eventually.
- Tight borrow. CHNG borrow might disappear and is likely to get even more expensive. Some hedged positions might be forced to buy in. CHNG sharecount will double as a result of this split-off and eventually arbitrageurs might run out of CHNG shares to borrow.
- Timing. Entering this trade closer to expiration and having unhedged MCK position might pay-off better. However, part or all of the upside might be gone till then. Also worth noting that MCK trades at all time highs and has already jumped 4% upon split-off announcement.
- Upper limit. Transaction is subject to upper limit of 11.4086 CHNG shares per share of MCK. At current prices the exchange ratio (at 11.13) is slightly below the upper limit. If the spread widens (i.e. MCK gets more expensive and CHNG gets cheaper) till/during valuation dates, the final pay-off might be less than 7.5% or get eliminated altogether.
- Valuation dates. Final exchange ratio will be determined based on the VWAPs on the 3rd, 4th and 5th of March, so one might wait till then to enter the position (IB deadline for tendering is usually noon on the expiration date). Keep in mind that due to upper limit on the exchange ratio, upside might be reduced or eliminated till then.
- CHNG to report quarterly results on 12th of Feb and it might affect the share price. McKesson reported earnings recently (4th of Feb).