Value Investors Club / LMT- LDOS Exchange Offer (LMT-LDOS Exchange Offer)

Description

LMT exchange offer into LDOS

Some cheeseburger money for Odd Lots…but if you have lots of different accounts, you can do

this many times over. Potential gain $2500 per odd lot, which is pretty decent (though not as good as NILSY)

Trade idea:

1) Buy 99 shares of LMT @ $257

2) Tender all shares before 8am on August 16th

3) Receive 813 shares LDOS (assuming current prices for LDOS and LMT remain at current levels)

4) Sell LDOS shares

Please be sure to read the information in the links below:

Information can be found here:

http://www.lockheedmartin.com/us/news/press-releases/2016/july/it-technical-service-exchange-offer.html

How they are calculating the exchange ratio here:

www.edocumentview.com/LockheedMartinExchange

The information Agent is: 1-866-482-4931 (toll-free)

The ratio of LDOS shares received per LMT share is calculated as follows:

A = LDOS VWAP calculated over August 9-12th (Adjusted for $13.64 special dividend)

B = LMT VWAP calculated over August 9-12th

C = Exchange Ratio upper Limit = 8.2136

D = Adjustment for receiving $111 value for $100 of LMT tendered = 111%

Exchange Ratio = if((B/A)*D>C,C,(B/A)*D)

You divide LMT price by LDOS price and then gross up by 111% per Prospectus

If that value is >than then Upper Limit then it’s capped at the Upper Limit. (A lower LDOS

and/or higher LMT price would cause the Exchange Ratio to move higher)

Based on current prices:

A = $48.35 – $13.26 = $34.71

B = $257

C = 8.2136

D = 111%

Exchange Ratio = 8.2136.

Exchange Ratio Upper Limit Hit = No

Incidentally, with the prices of LMT and LDOS where they are, the exchange ratio is right at 8.2136.

Risks

1) Unclear closing date. They have not disclosed and the information agent did not know

beyond, “closing sometime in Q3 or Q4”

a. I’m puzzled by this since the company should announce within a couple days the

shares properly tendered and what the exchange ratio would be. I don’t think

they are going to hold up LMT shareholders from trading by not making the

exchange for months…so it should settle within days of the August 16th time frame.

2) There is some basis risk in this trade. If the price you buy LMT at and the Price of LDOS

when you sell changes dramatically before you can sell it, you could end up with zero

profit.

a. Below I assume you purchase LMT today @ $253 and that the VWAP calculation

for LMT is the same as the current price. Then for various LDOS VWAP prices,

I show the LDOS breakeven price when you look to sell.

b. There are several variables to control for (LMT purchase price, LMT VWAP calc,

LDOS sell price, LDOS VWAP calc), but the one that strikes me as the most

volatile is the LDOS price so that's what I've focused this analysis on.

If LMT stays around $257, but LDOS adjusted VWAP price falls to say $33, then you’d still have

a profit of around $1200, and would not lose money even if LDOS fell to $31.

Alternatively, you could wait until the ratio is set on August 12th, and purchase your shares then.

Provided you have T+1 or T+2 settlement and you can get your instructions to your broker in

time, you could reduce the basis risk on the LMT purchase.

Another Option: Short the expected number of LDOS shares you will receive – currently 813

Keep in mind there will be a special dividend you’d have to pay as part of that short ($13.64 per

share), but presumably the stock will fall by that amount as well.

If you short LDOS now, and the VWAP of LDOS moves higher, the exchange ratio will be

reduced and you’ll end up with fewer shares in the exchange than you’re currently short, and

thus a loss on those extra shares.

You could also wait until the exchange ratio is set on August 12th before shorting LDOS.

Interactive Brokers has 70,000 shares available at -17.4% rebate currently.

The other risk here is that the settlement date for the exchange offer takes more than a couple

weeks, and you are paying out a negative rebate over that time. That said, sinceyou’re not

locked up on your LDOS shares (as you would be on the LMT you tender) you can always cover

your short and then just wait to receive shares from the exchange and then sell those again.

Note also that I’ve not taken into account trading costs since everyone has different brokers,

etc… So do your own math on trading costs.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

August 16th Exchange.

show sort by

			2016	2017
Price:	1.00	EPS	1	1
Shares Out. (in M):	1	P/E	1	1
Market Cap (in $M):	1	P/FCF	1	1
Net Debt (in $M):	1	EBIT	1	1
TEV (in $M):	1	TEV/EBIT	1	1