The upside of a canceled takeover offer
Sharp sell-offs beckon brave, informed investors
Market action can tell you a lot about the probability of a proposed acquisition actually going through.
Hong Kong-based Zoomlion Heavy Industries had made a $30 per share offer to acquire Terex (TEX, Financial) then raised it unilaterally from $30 to $31, further outbidding Finnish company Konocranes Plc’s (KNCRY) earlier all-stock takeover bid, recently worth only about $20 for each TEX share.
Terex’s approximately $25 market price told us that traders were skeptical either deal would go to fruition. Not long ago, Anbang Insurance, another Chinese company, had abruptly walked away from its "definitive" buyout of Starwood Hotels (HOT, Financial).
Management at Terex had hedged its bet on May 16 when it agreed to sell its material handling and port-solutions division to Konocranes for $1.28 billion. That unit accounted for $1.44 in 2015 revenues, but lost $8.6 million last year, mostly due to negative currency fluctuations.
Now that Zoomlion has left the scene, Terex avoids a $37 million break-up fee, which would have been due to Konocranes. If the less-than-full-company sale closes, TEX will instantly become more profitable while also sprucing up its balance sheet.
A rekindling of a full-blown takeover by Konocranes is still a rumored possibility.
Terex now looks quite inexpensive. Its shares routinely traded at much higher levels during the past four or five years. From late 2006 through early 2008, before the Great Recession, TEX had established all-time highs ranging from $66 to north of $96 per share.
Morningstar’s senior equity analyst Kwame Webb reiterated his buy rating on Terex after Zoomlion’s announcement, while affirming his fair value estimate of $29.
The sharply lower opening gave option savvy writers, with long-term horizons, the chance to snare some great premiums on TEX Jan. 19, 2018 expiration date puts.
Shortly after last Friday’s initial plunge, I sold some $18 and $20 strikes at $2.90 and $4.00 per share. Other ultra-conservative put sellers were paid $1.85 for the $15 strike, only committing to purchase at a net basis of $13.15.
By the end of the day, Terex had rebounded to $20.89, putting it above even the most aggressive of those three strike prices.
When selling puts the best-case scenario is always keeping 100% of all premium received up front. The worst-case result would be forced purchase of 100 shares per contract sold at the net price of the strike minus the put premium.
The $13.15 break-even for writers of the $15 series dropped to a level not seen on TEX since October 2011. The chart above shows how infrequently Terex was actually available at the "if exercised" price on the $18 puts I sold (at $2.90). Taking in $4 per share for the $20 strike puts eliminated my risk down to the $16 mark.
Depending on Terex’s future price action, I will either pocket some nice profits or end up owning its shares at what appear to be extremely cheap entry points.
The late day recovery means TEX is no longer offered below $20. The stock still looks enticing for outright purchase, though, or as an underlying stock for collecting put option premium.
Disclosure: Short TEX Jan. 19, 2018 $18 and $20 puts.
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