Bloomberg News

Options Show `Uncertainty' on Mergers, Deutsche Says

October 01, 2007

Options prices show that investors doubt whether several announced mergers and leveraged buyouts will be completed because of the sudden increase in corporate borrowing costs, according to Deutsche Bank Securities.

``The option market is still pricing in a fair amount of uncertainty for announced mergers actually closing'' even after the Federal Reserve cut its benchmark interest rate by a half a percentage point last month, Deutsche Bank derivative strategists wrote. ``Buyers' remorse is becoming evident in many deals.''

The probability of billionaire Sam Zell completing his planned $8.2 billion buyout of Tribune Co. is 42 percent, the second-lowest of 11 deals studied, the strategists wrote in a note to clients dated Sept. 28. The strategists calculated the probability based on Sept. 27 closing prices.

Tribune rose 0.7 percent to $27.50. The stock has been trading below the buyout price of $34 partly on concern that further ad losses may prevent Tribune from complying with loan covenants and getting the $4 billion bank financing needed to close the deal.

The strategists calculated the probability of eye-products maker Bausch & Lomb Inc. completing its sale to private-equity firm Warburg Pincus LLC at 90 percent. That's up from 69 percent on Aug. 21, Deutsche Bank equity derivatives strategist Scott Weiner said in an interview.

Bausch & Lomb shareholders on Sept. 21 approved a $65-a- share sale. The company agreed to be bought on May 16. The stock rose 0.6 percent to $64.41 today.

`Added Indicator'

Options prices are ``an added indicator apart from just looking at the stock price and the deal spread on where market participants think the likelihood of the deal closing is,'' Weiner said.

SLM Corp. (SLM:US) had the lowest probability, 19 percent, according to the strategists. The biggest U.S. provider of student loans, known as Sallie Mae, said Sept. 26 that it was informed by the group planning to buy the company that it is no longer willing to pay $60 a share because of a new law that will cut subsidies to lenders. SLM gained 0.5 percent to $49.90.

Last month, MGIC Investment Corp., the biggest U.S. mortgage insurer, abandoned talks to acquire Radian Group Inc, citing market conditions. Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc. also ended their $8 billion takeover of Harman International Industries Inc., which makes Infinity and JBL audio equipment.

Options indicate that investors are 100 percent certain about purchases of TXU Corp., the biggest electricity producer in Texas, Alltel Corp. (AT:US), the fifth-biggest U.S. wireless service provider, and Accredited Home Lenders Holding Co., the San Diego- based subprime mortgage lender, Deutsche Bank said.

To contact the reporter on this story: Jeff Kearns in New York at

To contact the editor responsible for this story: Chris Nagi at

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Companies Mentioned

  • SLM
    (SLM Corp)
    • $9.64 USD
    • 0.09
    • 0.93%
  • AT
    (Atlantic Power Corp)
    • $2.31 USD
    • 0.08
    • 3.46%
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