FDC Update

WU Priced Near $18

Dear Bottarelli Research Member,

I wanted to give you a quick update on the status of the First Data (FDC – NYSE) situation in relationship to the coming spin-off of Western Union. If you recall, I came across an interesting situation that involved FDC giving all their shareholders as of September 22^nd an equal amount of Western Union stock once they spin off the company. All the reports I studied said this spin-off would be issued without any cash or other considerations. In fact, the actual report read:

“First Data currently has approximately 765 million shares of common stock issued and outstanding. Based on the distribution ratio, First Data expects to distribute approximately 765 million shares of Western Union common stock in connection with the spin-off. The actual number of shares of Western Union common stock to be distributed will be determined based on the number of shares of First Data common stock outstanding on the record date. Holders of First Data common stock will not be required to pay any cash or other consideration for the Western Union shares they receive”

I’ve been scouring all their news releases and company websites to get some basic answers: What will WU be priced at? How soon can we sell shares of WU?

Now before I begin, let me preface this by saying that I’ve had an extremely hard time getting any answers from either company. The investor relations person at FDC told me that nobody can take my call because they’re all in a meeting in New York. Investor relations at Western Union transferred me over to Morgan Stanley (who I assume is helping them with the spin-off) where I was only able to leave a voice mail message. Well, to their credit, they did return my call this afternoon and I was able to clarify the situation.

Unfortunately, FDC shareholders will not get WU stock for free, as I originally wrote. Rather, the price of WU will be subtracted from FDC on the date of issue, making it nothing more than a special dividend. Why they failed to clearly disclose this in their press release literature is still a mystery. In fact, when asked about why this was not made clear, the FDC banking representative said that the details of the transaction could be found in the Form 10 document under “spin-off mechanics.” How anyone would have found that without being pointed in that direction is beyond me. When the initial news release reads “Holders of First Data common stock will not be required to pay any cash or other consideration for the Western Union shares,” I find it truly misleading. The phrase “or other consideration” should mean that the price of WU will not be subtracted from FDC. Luckily, all is certainly not lost.

According to the NYSE website, Western Union has been priced today under the symbol “WUWI” at $18.15 a share. Once you receive these shares, you can actively trade them however you wish. And based on that price, FDC will be trading for around $23.65 once the spin-off happens. Now, with FDC trading up almost $1.00 today, I still think owning the shares before the spin-off represents a good deal. After all, once WU is actively trading, you’ll see a double-price effect, which means you could see days where both FDC and WU move higher. Not only that, I think FDC will recover from their recent gap-down, thus making the recent sell-off based on their earnings restatement a bona-fide downside gift gap.

As I told you in previous alerts, I own shares of FDC. In fact, based on the recent down-move and subsequent recovery, I went ahead and bought more today. Based on these new developments, I think we could witness an arbitrage situation that could give us a 10% gain on the combination of each stock as the new FDC share price and the new WU spin-off begin to trade. So all told, if you own FDC stock, I still think we’ll make money.

In other trading news, I think we played Marathon Oil (MRO – NYSE) perfectly. Although the $1.80 price tick was not immediately available this morning, we hung in there and eventually got filled for $1.80 and $1.85 in the mid-afternoon market lull. Now, after the Fed announced they’re keeping rates unchanged, MRO has continued to move down, and your puts are trading back up to $2.15. That’s a nice 16% gain in a matter of hours! If these puts hit $2.30 by the end of the day, I say take your money and run!

PLAY: Sell your MRO October 70 Puts (MRO VN) if they trade at or above $2.30 by the end of today’s trading. If not, continue to hold.

It also looks like we entered Cisco (CSCO – NASDAQ) at the right time, as your calls are now trading $0.20 higher in the mid-afternoon. Not to be outdone, GIS and NWS are also moving higher, which is good news for our longstanding January call positions. In terms of GIS, I’m hoping a good earnings report tomorrow morning will push the stock higher. As for our other put position, JOE is trying to give back all of its gains and close today’s trading in the red. All told, we’re looking good on everything, so maintain your positions for more gains! And as always…

Lock and load

Sincerely,