Dole Food Company, Inc.
(NYSE:DOLE) 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 billion.
Dole recently sold its packaged food and Asian produce business to the Japanese trading house Itochu Corp
(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. Deutsche Bank
(NYSE:DB) 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.
Trade: 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.
Risk: $.30 per one lot
Breakeven: (Roughly) $7.70 and $10.30
Cash Outlay: $570,380
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 of $84,605.
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 substantial.
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.
No positions in stocks mentioned.