The tender offer for $Macy's(M)$
A customer exits the Macy's flagship department store in midtown Manhattan in New York
Macy's management team is diligent
I think at least they are motivated and committed to serving more stakeholders, aligning with the interests of small shareholders, large shareholders, and company employees. The key is that the increased offer is also beneficial to them. Therefore, their initial rejection of the $21 offer and their hope for investors to further understand Macy's situation indicates that they are not averse to privatization. Even though some poorly performing stores may be closed, the current property value is still attractive and worth negotiating.
As a small shareholder, we certainly hope that the management will negotiate further with the consortium to further increase the price.
Can the price be risen again?
I think there is still a probability, but it's not very high. If I have to guess subjectively, I would say about 30%.
The reasons are as follows:
1. Controversy over Macy's performance.
Some investors believe that last week's financial report was not as positive as it seemed. Although it beat expectations on the surface, the "store closures" will affect future guidance. But I think it's actually positive. The management team that doesn't know how to improve operational efficiency should be phased out. I also believe that Macy's value lies not in those inefficient closed stores, but in downtown properties and profitable high-end brand malls. When evaluating a company being acquired, it's important to consider the balance sheet rather than just the income statement. The background of the investment consortium includes commercial real estate REITs, and they are interested in the potential value added by these properties.
2. Controversy over Macy's stock price.
The Q4 financial report just came out, and the stock actually surged before trading hours, but it was forcefully suppressed in the following two days. The high trading volume in these two days seems somewhat suspicious. I initially thought it might be due to poor liquidity of companies under "acquisition pressure," and the exit of individual arbitrage investors could potentially cause significant fluctuations in stock prices. But now I believe it's a "manipulation" of price, similar to bargaining for fruits in a market. This is because the statement from the investment consortium also mentioned the new acquisition price of $24, which is "33.33% higher than the closing price of $18.01 on March 1st," and "16.67% higher than the previous offer of $21." Although I'm hesitant to believe in conspiracy theories, these numbers are quite coincidental.
Management's Choice
1. Management Accepts the Offer
The closing price on March 4th was $20.45, which is a 17% premium from the target price of $24. If the deal is completed within 6 months, the annualized return would be around 35%, which is quite substantial.
Normally, when the management officially announces acceptance of the offer, the stock price would rise on that day and approach the target price of $24.
2. Management Rejects the Offer
In this case, the management would need to present more reasons to support the company's valuation. They must further prove that the company's valuation is higher, whether through cost reduction, efficiency improvement, or direct repurchase. In theory, these measures could continue to drive up the stock price.
Of course, the investor composition may change. Those seeking to trade Events-Driven in the short term may exit, while long-term investors may enter.
If the management simply hopes to increase the offer price, what is the limit?
Since 2019, Macy's stock price has been above $24 only 15.9% of the time, covering nearly 85% with a $24 acquisition price. Most of the time it has been between $18 and $20. Apart from investors who successfully bought at single-digit stock prices in 2020, most have made a profit. Looking at the timeline, investors who entered in the first half of 2022 may have relatively higher holding costs.
From the normal distribution of stock prices, if the acquisition price rises to $26, it would cover 93.9% of the cases. If it rises to $28, it would cover 97.8%. Therefore, in terms of cost-effectiveness, if further negotiation is desired, $26 should be considered a limit price.
Action Plan
1. Half of the long stock position was closed yesterday. Regardless of whether to hold Call (long position) or Put (short position), it is more cost-effective.
2. The management's feedback is an important milestone. Personally, I believe there is a 70% chance of acceptance and a 30% chance of rejection (mainly to raise the offer). Therefore, I will continue to maintain a certain degree of far-term Call (but not exceeding a strike price of $26 to avoid IV crush) and also retain some near $20 Sell PUT to mainly earn time value.
If you are familiar with options, you can see that the options I'm holding are actually a Synthetic combination. When Call and PUT correspond one-to-one, with different strike prices and Delta not equal to 1, they fluctuate relatively less than the underlying stock.
Now, let's wait for the management's decision!
Happy Trading!
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