Tuesday, April 14, 2009

Violent Trade: The Merger Arb Trade Opportunity of the Year

Short: .365 shares of SINA for every FMCN bought
Buy: FMCN puts strike $5 expire Oct 2009 for $1
Potential Gain: 85%+
Expected sell date: ~7/1/2009

This trade can potentially yield almost 100% returns in a matter of months. The ONLY risk is that if SINA and/or Focus Media change or cancel the terms of SINA offer of .365 shares for owning a majority of Focus Media's business. SINA is giving 47 million shares per each 128.6 million shares outstanding for FMCN (47/128.6 = .365).

Here's your cheat sheet:

At $27.50, 47 million SINA shares that are being sent to FMCN are currently worth $1.3 billion

At $7, FMCN's market cap is $900 million.

Admittedly FMCN's market cap should drop after this transaction takes place - my guess is to $1-2 a share, but that's a minor point of contention when you've just received .365 shares of SINA stock for every FMCN stock you own. To look the difference between what your getting and what you have simply engage in merger arbitrage.

Buy 1000 shares of FMCN

Sell short 365 shares of SINA

-if the transaction goes through you should lock in at LEAST A 40% gain in a matter of months

-if FMCN is worth any more than $2 share, I'd sell that too

For those who want to be extra violent and earn another potential 40-50%:

Take this a step further by buying put options. Remember, your gain is 40% even if FMCN stock goes to 0! The only variable in this thesis that must work is that the transaction must go through!

In that case, why not lock in a price of $5/share for your FMCN shares as well?? If the transaction goes through as planned your total consideration can be something like this:

-$7000 for 1000 FMCN shares

-0 Sina shares, receive 27.50 per share, total $10,040

-buy Oct $5 puts on FMCN for $1, total cost -$1,000

-Puts expire in or out of money, minimum worth of FMCN and put options will be $4/share

-Put expires lock in at least $4,000 in profit (1,000 shares put at $5, cost of option $1, net is $4/share)

Thats $5k + $10k - $7k - $1K which equals a profit of $7,000 on a $7000 long investment!!!

Upside: potential return of 100%

Risk: SINA and/or FMCN, f* up their transaction

Disclaimer: You think I'm just lettin you have the opportunity to have an almost 100% return in just 3 months without gettin in on the action? I am long FMCN, short SINA, and I will be having outstanding put option orders in place shortly!


  1. FMCN is hearing additional takeover chatter from Fosun who already owns of 28% of FMCN and has been buying up huge blocks of the stock.Plus 35 percent of FMCN float is short. There was big call volume buying today as well. I think FMCN could have a big move higher imo. Links provided.



  2. Violent CapitalistApril 16, 2009 at 10:03 AM

    that is sort of irrelevant to this trade (you are still effectively long anyways) and the price offered will depend when their acquisition will go through.

    my guess is you wont hear about another transaction taking place with FMCN until the SINA one is done-

  3. I believe your analysis with respect to the puts is incorrect. Assuming the deal closes the new deliverable of the FMCN options will be adjusted to include the SINA shares accruing to each FMCN share. Assuming the combined value of the SINA shares and the FMCN stub equals or exceeds $5.00 in October the VA's will expires worthless and you will lose the premium you paid. Full disclosure: I am short FMCN puts.

  4. You are correct, the puts would include the SINA shares. Blog owner did not do any due diligence, or even ask anyone what would happen.

    Still a great trade though.