Value Investing News

Proctor & Gamble is spinning off its Folgers business to JM Smucker in a tax free spin off. There is a greater arb for odd lot tenders (99 shares or less) than for institutional size based on the upper end of the ratio which is 1.7213. The announced ratio today was 1.6342 for any shares tendered at and above 100 shares.

Based on the following pricing (PG-$66, SJM-$44.60), odd lot tendering carries a 16.30% return. To set up the trade you would purchase 99 shares PG at current market price and advise your broker to tender the shares into the exchange. To appropriately hedge yourself you would sell short 170 shares SJM(exact quantity is 170.4087 but fractional shares will be paid cash in leau). Your short would be closed out once your PG shares are exchanged into Folgers stock, which is exchanged one for one into SJM. Folgers stock will never trade in the market. You will bear market risk if you dont sell short the SJM but can always just sell the SJM into the market once you receive the stock. Keep in mind that you will probably be selling the stock with a lot of other people in the days following the reorg completion.

Gross P&L on the trade should be close to $1,065. Your broker should charge close to a 20% fee on the borrow of SJM which equates to about $4.50 per day. Your net P&L should still stay about $1k which is still about 15% for a 4-5 day trade. November 5th is the expiration of the tender so all shares would need to be purchase on 11/4 or 11/5 and tendered in. Details below are from PG's press release today.

http://biz.yahoo.com/prnews/081103/clm133.html?.v=53