Enough about the equity - look at BCE’s bonds. We posted last year that BCE’s bonds dropped off a cliff once the Teachers deal was announced. Made sense - lots of extra debt is going to pile in and the current bondholders have security over a soon-to-be highly levered company. When you don’t change the business, enterprise value is a constant. So creating shareholder value means taking from the bondholders.
Fast forward a year and the bonds are still trading down, which means they expect the deal to go through.
RBC Capital Markets analyst Jonathen Allen has published my favorite trade on BCE (we don’t blog all of our ideas, you know). It plays on the discrepancy here: the bonds are priced for a deal that is going to happen and the equity is priced for a deal that might not happen.
The trade works something like this:
• buy the stock. Quote is at $36.59.
• buy the bonds. Focus on the most liquid issue (call RBC for that, it’s their research).
If the deal happens the bonds have already priced in the risk and don’t move.
If the deal doesn’t happen, the stock drops (maybe $10) but the bonds will rally about 200bps. So that covers your downside on the equity drop.
Nice trade.
BUT (since I have had a month to think about this) - there is one scenario not covered here and it may explain the strange equity pricing. What if the deal happens at a lower price? A $37 equity deal would keep the stock flat and the bonds would stay where they are. Even in that case the, though, downside is covered, ex-transaction costs.
CWN
(disclosure: I own BCE)
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