Description

This is an arbitrage play on Johns Manville (JM: NYSE, closed September 15, 2000 at 12 3/8)

Company Overview
Johns Manville (JM) is a leading manufacturer of insulation and building products, with 1999 net sales of $2,161.8 million. Johns Manville manufactures and markets products for building and equipment insulation, commercial and industrial roofing systems, high-efficiency filtration media, and fibers and nonwoven mats used as reinforcements in building and industrial applications. Johns Manville operates manufacturing facilities in North America, Europe and China.

Bankruptcy / Trust
In 1982 JM filed bankruptcy (Chapter 11) due to the liability of asbestos claims. In 1988 JM emerged from Chapter 11 and the Manville Personal Injury Settlement Trust was established. The Manville Personal Injury Settlement Trust (the "Trust") owns approximately 76 percent of JM's common stock.

Going Private
On June 23, 2000, JM announced that it had entered into a definitive merger agreement with an investor group led by affiliates of Hicks, Muse, Tate & Furst Incorporated and Bear Stearns Merchant Banking. If the merger is completed, each outstanding share of JM common stock, will be converted into the right to receive $13.625 in cash and 0.02 of a share of a 13 percent pay-in-kind preferred stock having a liquidation preference of $100 per full share. It is expected the merger will be close before the end of 2000. JM's board and the Trust will be voting for the merger. Current top management will be staying with the merged company.

Recent Results
The last few years JM has produced solid results but there hasn't been much interest by investors probably due to the company's history with bankruptcy, it's viewed as a company tied to the construction industry so there are concerns with higher interest rates, and it's considered an "old economy" stock so is out of favor.

Arbitrage Opportunity
- The merger offer is $13.625 cash per share of JM with the deal expected to close by the end of 2000. I'm not sure what value to place on the PIKs so I'll make the math easy and assume they are worthless. JM is currently trading at 12 3/8. This makes for a 10.1% return (annualized it would be more).
- In addition, you get 0.02 of a 13% PIK.
- In addition, you can receive at least one and probably two $0.06 quarterly dividends per share (the next announced dividend is to be paid October 13 to stockholders of record September 25).

Arbitrage Risks
- If the deal it is delayed your annualized return will be lower.
- If the deal is cancelled the stock was already trading around 12 before the merger announcement and the company results have continued to be good so it's likely to still be worth around 12 (although there's no guarantee!). Another bidder may even surface if the deal falls apart.

Catalyst