Dole Food Company, Inc.
) chairman and CEO David H. Murdock is once again trying to take
the company private by buying up the 60% of outstanding shares that
he doesn't already own. This is not the first time Murdock has
attempted to privatize the produce giant; the 90-year-old
billionaire successfully did the same in 2003. At present, Murdock
is offering $12 per share of common stock, a valuation that
represents an 18% premium to Monday's closing price. This offer may
be augmented as the deal approaches, though, as share prices have
shot up 19.53% after word of the potential buyout reached
investors. The offer would value the entire company at $1.07
billion and suggest an enterprise value of $1.5 billion. In 2012,
the company reported revenue from continuing operations of $4.2
Dole recently sold its packaged food and Asian produce business to
the Japanese trading house
(TYO:8001) for $1.7 billion in April. Since the deal, Dole has been
able to better focus on its international fresh produce business,
which has historically the driving force behind Dole's revenues.
This move, though potentially profitable, is one that will cause
the company's earnings to be subject to the price fluctuations of
produce products, which are among most volatile of all commodities.
The potential complications involved with a produce-exclusive
enterprise were exemplified early this year, as a strawberry glut
slashed margins and partially halted a proposed share buyback,
which was eventually scrapped. The remaining funds earmarked for
the buyback were reallocated into growth-focused endeavors such as
the expansion of its shipping fleet. Concerns over the management's
seemingly erratic behavior caused investors to flee the stock as
these developments occurred; the buyout announcement sheds light on
these once-concerning developments.
The divesture in its less profitable ventures allowed Dole to repay
the majority of its outstanding debt, which had been racked up
during a borrowing binge in the mid-2000s. These debts carried with
them particularly high interest rates that had been cutting into
revenues for years. The company replaced the outstanding loan
pastiche with a more manageable $675 million term loan that allows
for more malleable cash flows. The debt relief provided by this
maneuvering will be taken into account by shareholders and
speculators alike as the buyout deal approaches, and this will
likely push the company's valuation higher.
The company is arranging a special committee to discuss
negotiations. Since shares are already trading at a higher level
than the premium offered up by Murdock, it is expected that the
nonagenarian executive will be forced to raise his bid for the
stock. Speculators seem to have recognized that the stock holds
what amounts to a guaranteed value level that likely sits above
current valuation, and they will continue to buy in until they are
told otherwise. Prior to news of the buyout, the stock was down
32.7% from an all-time high of $15.16 per share in September after
the sale to Itochu Corp.
) is said to be advising on the transaction and, according to a
Reuters report on the deal, has reported to Murdock via a "highly
confident" letter regarding the financing of the transaction.
: On June 6, a trader bought 19,431 DOLE July 10 calls for $.25 and
16,921 DOLE July 8 puts for $.05. What did this trader know? Well,
let's break it down.
$.30 per one lot
(Roughly) $7.70 and $10.30
On June 11, just five days later, DOLE spiked on a takeover bid is
trading $12.25. Let's check out these trade results:
- 19,431 DOLE July 10 calls went from $.25 to $2.25 for a net
profit of $3,886,000.
Unusual Option Activity
- 16,921 DOLE July 8 puts went from $.05 to zero for a net loss
We define unusual option activity as large block trades that
represent a large percentage of daily option volume. The block
trade is considered "unusual" if the option volume is above the
average daily volume over the past 22 days. At my firm, we scan and
analyze order flow from all of the major options exchanges in order
to identify any unusual option activity.
Analyzing unusual order flow gives traders a window into what the
positions that large institutional players have. The majority of
unusual option activity can be traced back to hedge funds, mutual
funds, and other large institutions. Knowing where these
institutions are placing their bets can be hugely advantageous for
any trader. These institutions have informational and technological
advantages that the average trader doesn't have, and the amount of
time and analysis that goes into every one of their trades is
Order flow can however at times be deceiving. One might logically
thing that a large block buyer of calls is bullish on the
underlying. This is not always the case. Remember that a large
number of participants in the equity options market are hedgers.
Long calls are a hedge against short stock, and long puts are a
hedge against long stock. With this in mind, my firm has developed
a 7-step trading plan that helps filter out unusual option activity
that will not provide actionable trade setups. It is by using this
plan that we are able to identify the most significant unusual
options activity trades every day.