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PPG and GGC exhange offer arbitrage
Posted by: whopper investments (IP Logged)
Date: January 11, 2013 08:54AM

PPG is divesting one of its units into GGC in a complicated merger / spin off deal (see prospectus). The basics of the deal are this- current PPG shareholders choose to exchange their shares for GGC shares at an 11% premium to the VWAP price of GGC for the three days preceding January 5th. Given GGC is so much smaller than PPG, the offer is subject to proration and also has a upper limit on the number of shares to be issues which would be hit if GGC’s stock price sunk while PPG’s rose (see page 23 of the prospectus for a description of

However, for odd lot shareholders (holding less than 100 shares) the offer is not subject to proration. So the trade here is pretty easy- on Tuesday, Jan 22, buy 99 shares of PPG’s stock- note that you need to buy on this date so you own the shares by Jan. 25. Call your broker to tender the shares.

I believe the new GGC shares should be trade-able on that Monday, but if not you can just calculate how many shares you will receive using this site PPG set up and short that many, and in a week or so the shares you receive will net out that short. Make 11% + or – any swings in the market in that week or so.

Now, you will note that you are subject to market fluctuations here. If the market dropped 20% in a week, you’d be looking at a loss. Or if GGC shares got crushed while PPG shares stayed flat or rose you might hit the upper limit and not make as much, or even take a loss. You could hedge in a couple of ways

  1. Sell a call on the PPG shares, and then buy it back on Friday. If PPG shares rise, just cancel your offer to exchange, sell them and buy the call back.
  2. Short GGC shares on Tuesday, though because the exchange ratio isn’t determined till Friday this could hurt you if GGC rises and the exchange ratio decreases.
Personally, I wouldn’t go for option 1- too expensive to trade just 1 call. And I don’t really like option 2, as it’s also expensive and exposes you to several risks.

I think the best option is actually just option 3- buy PPG and say that the market will do what it will do. You’re only exposed to market risk for a week, and, over a long career, sometimes the markets will rise and you will benefit a bit, sometimes they will fall and hurt you a bit. But the market exposure here will basically balance out over your whole career(likely a bit in your favor, since markets tend to rise).

Personally, I think the ALJJ tender is still more attractive. But once that Tuesday rolls around, buying and exchanging the share will look awfully attractive for the odd lot position.

Disclosure- Long ALJJ



Stocks Discussed: PPG, GGC,
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