Editor's Note: Our Financials analyst Jonathan Casteleyn will send subscribers a full report outlining our high-conviction thesis. In the meantime, below is a brief summary written by Hedgeye CEO Keith McCullough.
While BX and AXP remain two of our better Financials SELL ideas, one of our better long ideas in 2016 has been BATS. Jonathan Casteleyn is our senior Financials analyst on the stock and some of his current thoughts are as follows:
BATS represents a name with a very favorable risk/reward through year-end with a bid on the table (CBOE) set to close by June 2017.
- Bats Global (BATS) overnight monthly numbers for September were solid which makes it increasingly likely that the pending CBOE merger will continue to move to completion.
- The company put up its second best month ever for its U.S. options business with 11.7% market share (the main reason for the deal in our view) with the company continuing to maintain its #1 position in ETF trading, the emerging growth business at the firm.
- The merger analog in the exchange sector has been that once a deal is announced, competing bids have come through on these scarce companies so we still assign a 25% likelihood that there is a bidder for the new CBOE conglomerate (someone buys CBOE), or a competing bid for BATS standalone comes through.
- Recent deals in the space (including NASDAQ for ISE in the options space and DB1 for LSE in Europe) put competing take out multiples at $35-42/sh for BATS, equating to +17%-40% upside from current levels
- The overnight arb on the CBOE deal alone is $31.95 per share (1/3 of the value of CBOE shares plus $10 per share for BATS) or $2 per share in upside. That is a +10% annualized return on the latest proxy closing date of June 30th, 2017 with a breakup fee of $110 million.
KM
