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Avon Rings Bell, SEC Shoots It Through The Door

One month ago, shares of Avon Products (AVP) were halted back on April 14, 2015 at 12:50 PM (as posted by Benzinga Pro). Eight seconds later word spread that Avon would explore strategic alternatives. Over the next three minutes headlines crossed saying Avon may sell its US operations and that no deal would be imminent.
Avon shares would trade up roughly 15 percent after they resumed trading for a couple hours. At around 14:22 on April 14 there was an alert for a trade in the July $10 call options at the ask price of $0.65 for 1,140 contracts. Avon’s equity traded at $8.85. Not 20 minutes went by and news was out that Avon was not running a sale process, but that a sale option is part of the strategic plan.
Full Frontal Historical Deep Dive
Avon traded as high as $15.10 in June 2014. Shares collapsed over the coming months as Avon details hit about a cut to headcounts, hiring of a new CFO, chopped up LatAm Unit, and the settlement of charges for violations of US Foreign Bribery Laws in China.
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These new developments generated investor worry and drew the attention of speculators through the end of 2014 and into 2015.
Then comes the turn of the year. January 2015 started off with someone loading up on Avon option ahead of Jan 22’s Deal Reporter comments that TPG Capital, L.P. was in talks with Avon:
On January 25 rumors were swirling about TPG Capital, this time the story was that TPG held talks with Herbalife and NuSkin over acquisition considerations. Naturally one thing led to another and the next day someone was active in the weekly $8.5 Calls as new Avon takeover rumors made rounds.
The Jul 10 Calls came on the scene on February 19 2015 when 1,083 contracts traded on Open Interest of 1,378 at the Ask of $0.80. The equity was trading at $8.88 according to Benzinga Pro’s alert. On February 25th Benzinga Pro noted that TPG’s website had been updated to include Avon as a portfolio holding.
March was mute outside of an alert of April 10 Calls that traded 2,727 contracts at the Adk of $0.30 when the stock traded $8.91.
Then in April, around 12:50PM EDT on the 14th, Avon shares were halted ahead of a Dow Jones report that Avon was exploring strategic alternatives (specifically looking to review a sale of its North American operations). At 2:22PM EDT July 10 Calls again traded 1,140 contracts at the Ask for $0.65 when Avon equity was trading $8.85, 23 minutes ahead of a Bloomberg report that Avon was not running a formal sale process but that a sale was part of its strategic plan. On April 15th around 12:16PM EDT another 2,683 contracts traded at the Ask of $0.70 when Avon equity traded $9.03. On April 16th another 4,000 contracts traded at the of $0.60 with the equity trading $6.97. A weak earnings report on the 30th wrapped up the month of April.
Nearly a month passed and shares continued to slide. On May 14, one month after the “unconfirmed but part-of-our-strategic-plan” sale news a fake company out of the UK calling itself PTG Capital filed a tender offer through the SEC electronically. The offer was for $18.75/share which would have equalled a premium per share at the time of the release of 184 percent.
The general premium for a takeover is somewhere around 30 percent which is why traders were initially skeptical of the news. One of the largest premiums paid in recent history was when Merck bought Idenix Pharmaceuticals (NASDAQ: IDIX) back in June of 2014 at $24.50 a share, a premium of over 300 percent.
The Climax
The speculation here is that whomever bought the July 10 Calls on April 14 most likely did so on the rumored sale of Avon back in 2014 as management was restructured and the company dealt with US Bribery charges. That person very likely held the contracts equal to 782,300 shares. If we average the price of the equity at the time of each large contract purchase we get a rough notional equity value of $6,699,649. Someone was betting on a deal being done above the market valuation for Avon.
When Avon missed earnings and the stock continued to fall, those contracts lost more value. Assuming there was a single person and that single person acted out of upside greed instead of downside fear, it’s possible there would be enough motive to use a shell company to file a fake electronic release in order to pump the stock.
Using the fake tender offer price of $18.75 as a benchmark there is reason to believe the $18 is significant. At the time of the April rumored sale, Avon opened that day at $8.02. Perhaps this hungry individual expected a buyout valuation maybe twice that, so roughly $16. Being able to get a stock at $10 in July or sooner when it’s trading $16 or even $18 is very appealing. Once that pipedream failed to come to fruition, the suspected trader may have feared losing out on a much needed and hefty pay-day.
SEC Needs A Cultural Overhaul, Gut It And Rebuild It
More disappointing is yet another example of the SEC being behind the ball. There was no problem proclaiming their Flash Crash findings which turned out to be inaccurate, then they proclaimed their strength with the purchase of HFT monitor software, called MIDAS, from an HFT firm, which has done anything more than create the illusion of enforcement.
Now we have unreviewed, poorly structured, and somewhat plagiarized writing being published to the public through the SEC that is false and illegitimate, much like the orders we see placed in the open markets day in and day out.
So now it’s a waiting game. Does the SEC find something? Will these contracts expire? Will this person try something else on June 14? We all have to wait.
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It was me. Thought it was a good idea at the time, and unloaded to my muppets (learned that fron GS).