Friday, July 29, 2011

Is the Stillwater (SWC) Peregrine ( buyout deal in trouble?

Not overtly, but the market is flashing a clear signal of nerves.

Since Stillwater Mining (SWC) announced its offer to buy Peregrine Metals ( on July 11th, the SWC share price has taken quite a bashing, down from its U$22 level to the current U$15.50 or so. That's one thing that indicates shareholder dissatisfaction with the proposed deal, but what needs to be monitored more than anything else is the arbitrage between the two stocks. That's because (arb 101 coming up) if the difference in relative price between owning and owning SWC reduces, it signals that the market is confident the deal with happen and the value gap closes. On the other hand if the arbitrage increases, it shows that the market isn't sure this thing is going to go ahead and prefers holding the less-to-lose-from-failure SWC than the more-to-lose

So how the calculation is done in simple bullet points:

1) We take the closing price for SWC for every day since the deal was announced (we use intraday for today July 29th)
2) We multiply the SWC share price by 0.08136, the ratio used in the deal.
3) We then add the cash component for the deal, of U$1.35
4) We then do the forex, converting the USD price of SWC into Canadian Dollars (CAD), as that's the currency in which trades. We use the closing forex price between the two currencies for every day (intraday for today).
5) We now have a number that indicates "fair value" of stock if the deal goes ahead.
6) We then look at the closing prices every day for (intraday for today).
7) We subtract one from the other and we arrive at the arbitrage between the two stocks.
8) Finally, we put together this little chart:

What this shows is a slow but steady increase in the arb between the two stocks. Which suggests a market that's evermore nervous about the deal going through, as the current 22c arb represents a 9.6% gap between the two prices.....that's a lot in a world that will give a normal 2% to 4% arb on deals that look solid and likely.

The bottom line is that the SWC/ isn't actively in trouble yet, but the market is saying "look, this one doesn't have the fat lady singing yet". Worth a continued place on your radar, methinks. DYODD.

UPDATE: A few minutes after hitting the publish button on this, the arb moved to 24c (SWC U$15.44, CAD$ 2.25). Just sayin'.

Also, let's take a line for Disclosure: No position in either stock and not planning to move into either unless something big happens, but I sold my at CAD$2.60 a couple of days after the deal was announced for a near 200% total win and also reco'd to the subs list that they sell at that time.