Since the bid was announced Qantas has traded at around a 5% discount to the $5.60 offer price. This discount mostly reflects the time value of money – buy the stock now at $5.37 or thereabouts and receive your money after the offer closes in March (or later if extended) – but also takes into account some uncertainty about whether the bid will actually go ahead.
For an investor thinking about arbitraging between the market price and the bid price it’s important to think about the possible downside risks compared to the fairly small upside. Consider Coles’ share price after they announced on October 19, 2006 the rejection of KKR’s buyout offer: down 9% in one day.
Looking at Qantas’ previous trading levels and operational performance a 9-10% fall seems to be a reasonable estimate of the downside should the bid fail, whereas the upside seems limited to perhaps 4% at last week’s close. While a Government inquiry into the bid shouldn’t result in failure it might extend the amount of time taken for the bid to go through and that makes the upside look even worse. It’s a classic ‘time value of money’ problem: would you rather have your $5.60 a share in 2 months or 4 months?
These factors explain why the market price hasn’t yet traded up to the bid level. As we get closer to conclusion they should converge.
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