Einhorn's Martin Marietta Short Exposes Vulcan M&A Bulls
"We don't believe Mr. Einhorn's comments regarding valuation as measured by a P/E basis represent anything new," wrote Wells Fargo analyst Adam Rudiger in a note to clients reacting to Einhorn's short. While Einhorn focused on Martin Marietta's share valuation at a price of 35 times forward earnings as a key to his short position, Rudiger argues it may be the wrong valuation metric. "
Still, it's Vulcan Materials, a bystander to Einhorn's short position, that may be the most interesting stock to watch.
In the moments after Einhorn disclosed his short, Sachin Shah, a special situations strategist with Tullett Prebon says that the spread on Martin Marietta's share exchange offer for Vulcan Materials rose from around $1 to $3.32. If traders were shorting that spread with the expectation that a deal will occur, Shah says Wednesday share gyrations could have yielded a quick $2 return as the spread quickly narrowed from $3.32 to below $1.
"People realized at the end of the day nothing changed about a possibility of a deal, it just changed what Martin Marietta would have to offer Vulcan Materials," says Shah. Martin Marietta's $6.7 billion share offer to acquire Vulcan Materials, a company with more than double its revenue, was contingent on a conversion that gave Vulcan shareholders 0.5 Martin Marietta shares for each share.
By Wednesday's close, an almost identical share drop of Martin Marietta and Vulcan -- and an end of the day merger spread of less than $1 -- signaled that traders expect the share conversion to remain in place, even as the hostile bid came against large difficulties in May.
"The market is saying that Martin Marietta is still pursuing the Vulcan Materials transaction," says Shah. He adds that Einhorn's short gives credence to Vulcan Materials resistance to the share offer launched in December.
If Martin Marietta's M&A fortunes were to change in courts, Shah says the company will need to address points made by Einhorn and help investors understand the company's worth, which has fallen from nearly $90 a share in mid-February to $66.75 in early Thursday trading. Only then can shareholders and both companies re-address a fair merger price.
Earlier in May, a Delaware court delayed Martin Marietta's bid for Vulcan Materials by four months and beyond the company's June annual shareholder meeting where a slate of hostile Martin Marietta directors had been nominated to Vulcan's board.