Is An LBO Of Cardinal Health Imminent

Tyler Durden's picture

The below chart which compares CAH CDS and stock, shows that something may be afoot in Cardinal Health, and that someone knows something, but is hiding their knowledge from the stock very well. As can be seen, CAH CDS has surged over the past 5 days, nearly doubling from an average level in the 60 to about 120 today. For an investment grade company rated Baa3/BBB+ which barely has any debt concerns, this kind of CDS jump on no credit adverse news means only one thing: the imminent incursion of a massive load of debt, most typically associated with a Leveraged Buy Out. Yet taking a look at the stock shows that so far anything that credit may know is not being picked up by the stock. A typical LBO results in a 20-40% stock premium, so if true expect the stock to jump to $38-$44 as this news is digested.

Furthermore, the 3s5s in CAH is massively steeper, also a traditional imminent LBO sign:

And some other telltale signs:

  • Several large blocks in CAH December $35 calls (so now we have a timeline).

  • And an odd increase in CAH volume, orders of magnitude above the average.

Of course the biggest indicator here is the CDS. It is very possible that someone knows of a isolated credit negative event that won't have an adverse impact on the stock, but it is unlikely. If anything, one's money should be on a take out. Buying a few copycat December $35 calls may turn out to be a rather profitable trade soon.