Stock Deal: Churchill Downs (CHDN)- Likely Avoid

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I just wanted everyone who follows the stock market to know there is a Dutch Auction tender offer for Churchill Downs (Ticker: CHDN) that was announced this past Wednesday. Yes, this is the Churchill Downs stock headquartered in Louisville, KY that is famous for the Kentucky Derby.

CHDN is offering to pay somewhere between $230 to $265 per share for shares of their stock. As the stock closed Friday at $252.80 (near an all-time high), there is a very real chance you could lose money on this tender unless the price of the stock goes down substantially.

A few notes of interest on this one:

This is a Dutch Auction. What that means is that if you were to tender your shares, you would need to specify a price (in $1 increments) that you are willing to sell your shares for. The company looks at all the shares tendered. Let's say that they could buy all the shares tendered at $250 a share or lower and this would require them to spend right at $500 million on their stock. Then, everyone who tendered at prices between $230 and $250 a share would have in essence sold their shares for $250 a share. That would be the lowest price to take all of those shares.

In terms of potential fraud, I'm not concerned about that. This is not one of those mini-tenders for under 5% of the stock. It is well over 5% of the stock. Also the buyer is Churchill, not some third party I've never heard of. The press release I saw was on nasdaq.com, so that gives me confidence this is a legitimate deal- just not good enough for me to participate.

There is the 99 share odd lot clause on this, which is good. IF the stock right now was $220-225 a share, I'd almost certainly be buying it. But not at $252.80.

One other variation on the theme that some might consider is this- buying 99 shares at around the current price and tendering at a price where the shares would only be taken at a profit, say $255-260 per share. If you did 99 or fewer shares you wouldn't have to worry about being prorated, BUT your shares would only be taken if enough other people held out for the higher prices. This is far from a sure thing.

Another variation might be to place a Good til Cancelled order to buy if the stock comes down to a lower price, say, $210-225 a share. Even then, you will need to watch it closely and remember to cancel the buy order once the deal expires. After all, you wouldn't want to be stuck with shares you bought a few days after the deal expired.

The deal expires February 7th- keep in mind that if you do this one your broker's deadline will likely be 1-3 business days in advance of the official deadline.

You can put this on a watch list and if the price comes down enough before the deal expires, then I'd reconsider it.