More than two months ago, news came out that PLDT shall be moving to delist DGTL from PSE. The plan was for PLDT to buy the remaining shares of DGTL out from the market since it already owns 51.55% of DGTL via its transaction with JG Summit. Well time flies and by tomorrow, 05Jan2012, the tender offer of PLDT to the public ends.
What was included in the PLDT offer in buying the remaining DGTL shares held by the public?
DGTL shareholders were given two options: (1) PLDT will buy the shares at Php1.59495 per DGTL share held (currently DGTL shares trade at Php1.59 to Php1.60 levels); or (2) or get 1 PLDT share for every 1,567.45 DGTL shares held. The default option to be exercised for the shareholders will be option #1, unless of course you inform your respective brokers that you want option #2.
At face value, it looks like both options have the same benefits, but upon disclosure of these options, trading volume of DGTL actually went up albeit trade prices staying within the same levels. It was actually the most active stock yesterday. People were actually not selling off their DGTL shares because of the impending PLDT purchase. In fact, the market is trying to accumulate more and more DGTL shares even if days from now, PLDT is going to buy these from them anyway.
Why is this? CitisecOnline provides a very good insight on this market behavior: arbitrage. Simply defined by COL, arbitrage is the opportunity to profit from a transaction. At first glance, we might think that the offers are the same since if one is better than the other, then shareholders will definitely choose the better option. But more sophisticated traders (or less risk averse players) actually see option #2 as the better option.
There is arbitrage opportunity in option #2 (get PSE: TEL shares in favor of DGTL shares held) since the “exchange rate” of DGTL to PLDT shares is lower than the current TEL share price. Which means with the swap, shareholders indirectly buy TEL shares cheaper compared to market price. Based on COL computations, the potential gain with the swap is at 1.74%. Details are on their Research section.
But of course, this seemingly attractive option comes with the risk since PSE: TEL share prices can move daily. The arbitrage opportunity above only exists assuming TEL share prices remain at a certain level, and once it falls below the identified level, the swap becomes disadvantageous.
Same thing with other market transactions, it is either you lock in the gains by choosing cash in option #1, or you risk it some more by choosing shares with its potential upside and downside, via option #2.
The deadline for DGTL shareholders to decide is by 05Jan2012 but the settlement of the PLDT shares for those who choose option #2 will be on 19Jan2012. So there is more or less a two-week window for PLDT share price to move, either for the benefit or disadvantage of those who will choose option #2.
Given the trading volume we have seen lately for DGTL, it seems that there are lots of faithful stock players who believe in PSE: TEL, at least until 19Jan2012.