Reaping lessons from Wild Oats: Market value-based make-whole feature caps protection, says Lehman

By Kenneth Lim

Boston, Feb. 23 - There's takeover protection and then there's takeover protection, and investors should be aware of the limitations of market value-based make-whole features, wrote Lehman Brothers convertible analyst Venu Krishna in a report.

The report came as part of note on Wild Oats Markets Inc.'s takeover by Whole Foods Market Inc. That deal pushed Wild Oats' 3.25% convertible due 2034 up a couple of points outright, but the paper fell on a dollar-neutral basis and hit hedge investors for several points.

"The potential loss to arbitrage investors from the announced all-cash takeover of OATS serves as another reminder that the presence of takeover protection language does not guarantee that investors are made whole in all scenarios," Krishna wrote.

Wild Oats' takeover protection was a "market value-based" feature that was used when takeover protection first emerged in convertibles. The problem for hedge investors was that the embedded premium in the convertible was about 20.3 points before the takeover was announced, while the make-whole feature was worth just over 8 points because it was based on the value of the convertible before the announcement, Krishna explained.

Other limitations of the Wild Oats takeover protection include requirements that deals be all-cash and that the stock closed below 105% of the conversion price within a certain period prior to the takeover announcement.

"We would view securities that have this type of capped protection with greater caution," Krishna wrote.

Krishna highlighted six other convertibles that have market value-based takeover protection and warrant a closer look: CV Therapeutics Inc.'s 2.75% convertible due 2012, the Kulicke and Soffa Industries Inc. 1% convertible due 2010, the Oscient Pharmaceuticals Corp. 3.5% convertible due 2011, the Palm Harbor Homes Inc. 3.25% convertible due 2024, the Sunterra Corp. 3.75% convertible due 2024 and the Thoratec Corp. 1.38% convertible due 2034.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.