Kohl’s (KSS), mcap=$3.8bn, price $29.60 vs $46.6

Merger arb pitch:
– Merger arbitrage that is best played with 2031 notes rather than equity – bonds have a much more attractive upside/downside ratio.
– Very poorly executed strategic review with management wanting to stay independent, but there is a good probability deal is announced shortly.
– Equity offers 20% upside vs 25% downside in case of failure.
– 2031 notes trade at $91 and have a $101 change of control language.
– In the deal break scenario bonds would trade down to $87, or 5.3% yield, where similar BBB- 10-years sit.

Valuation: $KSS bonds provide a 2:1 upside/downside payoff + a little bit of accrued interest till the merger announcement.

Exp. gain: 11% to $101

Full $KSS write-up (free guest account required):

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