Monday, December 29, 2008

Special Situation Updates on CEG, ROH, and RSG

Constellation Energy is in the doldrums thanks to its breakup fee to Berkshire Hathaway's MidAmerican Energy:

EDF estimated that terminating the agreement with MidAmerican would end up costing $2.4 billion in liquidity -- a figure that implies more than a 100% return on Buffett's initial investment over a 16-month holding period. That's a very profitable failed bid, particularly if one considers that Buffett puts together deals very quickly, without resorting to outside advisors.

My uncovered CEG short calls at 35 are thankfully far out of the money. Rohm and Haas sank today because Dow Chemical's ability to pull off its buyout unassisted is now in doubt:

The Kuwaiti decision deprived the U.S. group of about $9 billion in planned financing which it would have used for the Rohm deal, but unidentified people close to the situation told the FT that Dow could still tap a $13 billion bridge loan to pay for the takeover.

The sources also said Dow was likely to try to renegotiate the price of the deal to reflect the recent drop in Rohm's share price, the newspaper said, adding that both Dow and Rohm declined to comment.


I predicted in my post yesterday that Dow's share price would drop today, so it's nice to be vindicated. Rohm and Haas fell without the certainty of the deal to prop its share price, so my uncovered calls are much safer. I just wish Republic Services would drop some more:

The deal combined Republic, the nation's No. 3 solid waste hauler, with No. 2 Allied to form a mightier No. 2. The newly formed Republic Services boasts a roughly 17% share of the U.S. solid waste management market vs. 24% for top player Waste Management WMI, figures Standard & Poor's analyst Stewart Scharf.

I had sold short some calls on Allied Waste after its acquisition by Republic Services had been announced. One wrinkle that I hadn't anticipated was that, in a stock merger, the options of the target company (AW) would convert to those of the acquirer (RSG) at the same strike price. D'oh! Right now I'm hanging onto some very long-dated short options of RSG in the hopes that the share price will drop, and these options are very much in the money. Wost-case scenario: I'll have to buy them back later in 2009 after their premiums have decayed.

I may soon face a similar scenario with my uncovered short calls on Wachovia (WB) if they convert to Wells Fargo (WFC). Double d'oh! From now on, I'll probably stick to all cash buyouts in my special situations plays to avoid these option conversion problems. It also wouldn't kill me to consider short calls on the acquirer from time to time.

Nota bene: Anthony J. Alfidi is short calls on CEG, ROH, RSG, and WB at the time this commentary was published. He has no positions in DOW or WFC at this time.