Straddle and gain

Recently RCOM hived off its tower business to GTL infra. Based on rumors and news items available on the issue the existing shareholders of RCOM will get shares of the GTL infra in the ratio 1:3. As I write this RCOM is trading at INR 200 and GTL is at 48. This means that the telecom business of RCOM is available at an unbelievable price of INR 56 (Current price-price of 3 shares of GTL).

RCOM is also planning to acquire a cable company and then de-merge the BIG TV (DTH service) business. The market leader DISH TV is at INR 45. Hence it wont be inappropriate to assume that the BIG TV will get a price closer to INR 20. If this is reduced from the net figure of RCOM ie INR 56 then the telecom business valuation is even lower at INR 36 (net price-DTH business).

Now this is unbelievable. Therefore I see following two possibilities:

1. The share swap ratio will be at 1:2 as against the rumored 1:3 (still the RCOM stock price will look tempting) or
2. The GTL infra will correct heavily from here to compensate for the interest burden it will have to take post this deal.

Therefore I propose following:

Go long on RCOM (as it is available for a very cheap value) and simultaneously short GTL infra. There is a hidden straddle in this strategy (short GTL and long GTL, which will be factored in RCOM value) thereby taking the advantage of cheap valuation of RCOM. This looks to be a very good risk free money making avenue.

Kindly post your comments on this. If you believe that my observations are wrong feel free to correct me.

Don’t forget to consult your advisor before investing any money based on my strategy.

PS. please accept my apologies for remaining absent from blogging.