“Bonus savings account” with Sky Deutschland (ISIN DE000SKYD000) voluntary tender offer

Ruppert Murdoch is reshuffling his empire. Today he announced that BskyB, his British carrier has bought the 21st Century Fox 57% stake in German broadcaster Sky Deutschland.

Under German rules, once you transfer more than 30%, you have to make an offer to all other shareholders as well. This is from the offical web site:

Offer to minority Sky Deutschland shareholders
Following the agreement to acquire 21st Century Fox’s 57.4% stake in Sky Deutschland, BSkyB has announced that it will launch a voluntary cash offer to Sky Deutschland’s minority shareholders at €6.75 per share. There is no minimum acceptance condition as BSkyB believes it can realise the advantages of closer collaboration with Sky Deutschland and support its continued growth and development with the 57.4% stake it is acquiring through this transaction.

Although no details have been published yet, I think the likelihood of this going through is very high. Consequently, the stock now trades at 6,75 EUR.

However I find this quite interesting because if you buy the stock now, you get a free put option, as you will be able to tender the stock into the offer at some point in time. Depending on the time horizon, this option is worth between 4,5-8% (30-90 days). I don’t think that there will be a higher offer or something, but based on the historical volatility there is a good chance that we see slightly higher prices. Effectively it is a 0% savings account (quite attractive these days) with a bonus component.

Of course you cannot sell the option directly, but you can buy the share and make a pretty one sided bet on higher prices until the offer expires. At current prices there is no downside risk. A more sophisticated investor could buy the stock and sell a call in order to monetize the put option.

It is to a certain extent quite similar to the FIAT case but in my opinion with less execution risk.

Just to be on the safe side: I would not buy Sky Deutschland outright, this is a pure “special situation” investment.

For the portfolio, I will allocate a 2,5% position at current prices to this special situation, my return target is 5% within the next 30-90 days.

DISLAIMER: This is not a free lunch, of course there are risks which I haven’t mentioned or though of. But to me it looks like a pretty good risk/return progile.

12 comments

  • Today is the last day to accept the BSykB offer (“voluntary cash offer to Sky Deutschland’s shareholders at €6.75”),
    if you have your stocks at the German discount broker FLATEX.
    (I dont know about other brokers, but probably similar deadlines)

    Just to remind everybody to close this “Außer Spesen nichts gewesen”-deal, because lower share-prices are likely after expiration of the offer.

    It was still a nice trade Idea, because the upside potential was there. Thanks MMI007!

  • Nice one. The floor doesn’t have a big premium to the undisturbed price which is always beneficial for these trades as it limits the risk and allows to take bigger positions.

    BTW Fiat is trading “ex rights” today as the vote is in two days. The support from “bonus bank account traders” seems to be gone.

  • “this option is worth between 4,5-8% (30-90 days)” : Did you calculate the option price based on historical vola and current price of Sky? I am not sure this is correct because the current price (at least partially) already reflects the voluntary offer. Hence the future evolution of the price of Sky is not following a random walk. In particular, the chance of the market price going above 6.75 will be less than what is implied by a random walk.
    I have another question. You make this a small part of your portfolio (2.5%). Why? Normally, a smaller size reflects risk consideration. But here the risk is pretty low (at least compared to standard investment in equity). So if you think the expected return is good, shouldn’t you make this a larger portion of the portfolio?

    • #lupo, yes the risk is small but 2,5% is already a “half” position. I wanted to leave some space if the price would drop.

      Clearly, historical vol is a poor proxy, on the other hand we might have some other factors playing a role so I still think it is a valid benchmark. If you have a better one, let me know.

      mmi

  • In Germany, you can buy a discount certificate to “buy the share” and “sell a call”. Every private investor can find one, which suits his risk appetite. For instance with 6,50€ cap and closing day 18th Sept (~55 days) you can get abt. 4% discount or 9% p.a. return – if you have low transaction cost at a discount broker.

  • Mal schauen ob Paul Singer sich wieder 5% sichert.

  • Sigh…used the wrong numbers above.

    If it’s 30 days, then.

    Buy 100 shares at 675 EUR and SELL 1 call expiring in 20 days (on 15/08/2014) and collect 16 EUR in premium.

    If it’s 90 days, then it’s really attractive.

    Buy 100 shares at 675 EUR and SELL 1 call expiring in 80 days (on 17/10/2014) and collect 37 EUR in premium.

    http://www1.interactivebrokers.ch/contract_info/v3.8/index.php?action=Option%20Chain&entityId=e1401275&lang=en&wlId=IB&showEntities=Y

  • Interesting idea….

    Looking at the closest expiry option, I see the 0,52 EUR for selling a 6,2 EUR strike price call option expiring in 20 days.

    Best case is it is exercised and you net 6,2+0,52-6,25 = 0.47 EUR profit. Or if price falls, you just tender it in and pocket the premium.

    Is my above calculation correct?

    What are the “risks” that you haven’t mentioned?

    Also, what will be the time horizon here? Will more details be announced (such as deadline, etc) ?

    • there are always risks even if you don’t know them. BSkyB shareholders could sue etc etc.

      I did not check all the details yet, i guess you will find a lot of details in the German Aktiengesetz

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