6 Comments

One could write some KVUE calls to enhance the return / somewhat mitigate the downside risk.

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That's not a bad idea, thanks Moritz!

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I think the risk of KVUE selling off post exchange is significant and should not be dismissed. Firstly, free float of KVUE is currently 10% with further 80% shares being listed post exchange leading to large potential overhang.

Secondly, was a similar situation last year when MMM spun out NEOG in a similar exchange offer with 7.5% discount. 1 day before exchange (Aug 30th) deadline NEOG traded at $21.17, just 7 days later (by the time most people received shares in their brokerage account) NEOG was trading at $16.95 (6th Sep) a 20% drop elimating the discount you received and resulting in an overall loss. You could mitigate against this by hedging KVUE, however borrow cost is very high (40% currently due to small free float) and will likely continue to rise into tender deadline.

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Thanks for the comment Sam. I agree that it is certainly a risk. However in my experience doing several of these they rarely fall so much as to wipe out the 7.5% profit. On balance they're profitable even if some don't work out. One way we mitigate this risk is by selling our shares the moment we receive them. We work exclusively with Interactive Brokers and they tend to get the shares in our account faster than virtually any other broker because their systems are so highly automated. This means we can usually sell before most people. But it is no guarantee and that's why this isn't a true risk-free arbitrage.

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So the odd lot JnJ tender trade was a loss. 99 shares purchased with a broker with shares registered in the Street name means they were tendered at the the prorated 23%.

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I’m not sure which broker you used but that sounds unusual. 99 shares purchased and properly tendered at Interactive Brokers was not pro-rated. However you needed to tender all of your shares, which must have been less than 99 shares across all of your accounts with that broker (not just in that account).

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