Why Dominion Diamond Corp Stock Just Jumped 26%

By Rich Smith Markets Fool.com

What happened

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Shares of arctic diamond miner Dominion Diamond Corporation (NYSE: DDC) are on a tear. Up more than 26% in early Monday trading, they were last clocked at a 22.6% gain as of 11 a.m. EDT.

So what

Billionaire businessman Dennis R. Washington's The Washington Companies group has apparently been talking with Dominion Diamond, about taking over the company, for some months. Dominion hasn't been totally averse to the deal, but it had asked Washington to refrain from making public proclamations regarding the negotiations. That silence ended yesterday, when Washington decided to enlist shareholder support for its offer of $13.50 a share to acquire the company -- making its offer public and upsetting Dominion to no end.

Dominion quickly responded with a statement of its own, dismissing the bid as "generic" and "boilerplate," blasting Washington as lacking "experience in the highly specialized diamond mining and marketing industry," and calling its offer "opportunistic." (Dominion shares sold for more than twice their pre-weekend sub-$9 share price as recently as two years ago).

The Washington Companies think their offer to buy Dominion Diamond is rather sparkly. Image source: Getty Images.

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Now what

In short, Dominion Diamond is not terribly enthused with the offer, and there's no guarantee that any acquisition will happen, at any price. Nevertheless, The Washington Companies are persisting in their pursuit of the company, even suggesting they might propose "an increased offer price" if Dominion agrees to permit them to conduct due diligence on its business. So a deal might result at some point, and perhaps at an even higher price than Washington have already offered. (In fact, Dominion may have been positioning itself to argue for a higher price when, late last week, it issued new guidance predicting its sales will surge more than 60% in the new year).

That guidance notwithstanding, when you consider that Dominion Diamond's last earnings report featured a near-30% drop in revenues, and that the company has been losing money for more than a year, the prospect of a huge premium to last week's share price probably looks pretty attractive to investors today. Now that the negotiations are public, don't be surprised if the pressure increases on management to go ahead and make a deal.

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Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.