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BCE: A Short Target Proxy for Citigroup?

by: FP Trading Desk September 19, 2008 | about stocks: BCE / C    

FP Trading Desk

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The decision by Britain’s Financial Services Authority to put a temporary ban on shorting financial stocks has many market participants wondering if it part of a co-ordinated effort and the U.S. Securities and Exchange Commission will do the same.

If it does, BCE Inc. (BCE) will very likely become a short target as a proxy for Citigroup Inc. (C), according to Desjardins Securities analyst Ron Mayers. This is because many consider Citigroup – one of the banks that agreed to fund BCE’s C$52-billion buyout – the only risk left in the deal, he said in a note.

Earlier this year, the SEC did enforce temporary emergency protections to protect some financial firms from traders making bets against their shares. These included mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE).

Short sellers borrow a stock then sell it with the expectation that the price will fall. It is legal but has been criticized as a result of traders potentially spreading rumors about a company’s woes to drive the share price down.

The SEC now appears to be looking at permanent rules prohibited “naked” short-selling,” where traders agree to sell a stock without an agreement to borrow it first.

Nonetheless, at C$34 per share, BCE shares have 25% of upside compared to the C$42.75 per share buyout price. They have fallen roughly 15% in the past month as investors worry that funding for the buyout may fall apart. It is expected to close by December 11.

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