By Gunjan Banerji
AT&T's victory in its legal battle to buy Time Warner Inc.
likely handed a win to merger arbitragers, particularly some of
Wall Street's biggest hedge funds, who had bet the deal would go
through.
The deal has attracted interest from big firms. Hedge funds such
as Highfields Capital, Baupost Group, Sachem Head Capital
Management, Paulson & Co., Fir Tree, Oz Management, and
Pentwater Capital Management all reported holding Time Warner
shares in recent regulatory filings.
Shortly after 4 p.m. on Tuesday, U.S. District Judge Richard
Leon approved the roughly $80 billion merger. The decision sent
shares of Time Warner rallying, a boon for merger arbitragers, who
buy shares of the takeover target on the bet they will rise to the
agreed-upon deal price. The scale of the deal also meant it could
have had wide-reaching ripples across the stock market, with a
ruling against it potentially causing investors to sell stocks of
other companies in pending tie-ups.
"This deal is different in that it's going to affect a lot of
other things," said James DiLeva, managing director of event-driven
strategies at WallachBeth Capital, before the announcement.
The judge's decision comes after the end of the normal trading
day, which concludes at 4 p.m. Investors are typically able to buy
or sell shares of companies in afterhours activity. Shares of Time
Warner jumped 5% after the market closed Tuesday, according to
FactSet. AT&T slipped 2%.
The decision also marks the conclusion of a 20-month saga that
began when AT&T announced its decision in October 2016. It was
expected to close by the end of 2017 but has faced regulatory
scrutiny and roadblocks. Worries about the scale of the combined
company led the Justice Department to sue in an antitrust case in
November. The shares and options for both companies have ricocheted
on the twists and turns of whether regulators would approve the
consolidation.
Hedge funds hold 20% of Time Warner's shares, according to
FactSet, and traders said the sector's exposure to the deal is far
larger through the use of options and other derivatives. Some
aren't even by traditional merger arbitragers.
Buzz about the deal has ramped up ahead of the court ruling, Mr.
DiLeva said, with the two stocks becoming some of the most
talked-about in phone call conversations with clients.
"People have made their bets and stuck to their bets," he said.
They "have always felt that the government had a pretty weak
argument."
In merger arbitrage, the arbitrager typically shorts, or bets
against, the acquirer. Shares of AT&T Inc. have fallen 12%,
this year to $34.35 before Tuesday's afterhours action. Time Warner
Inc. was up 5% to $96.22 in 2018 through Tuesday's closing price.
When AT&T announced the deal in 2016, it agreed to pay $107.50
a share for Time Warner, evenly split between cash and stock.
Investors also sent options trading into a frenzy this week
before the decision, data from data provider Trade Alert show.
Volumes for both Time Warner and AT&T have been more than
double the daily average, the data show. The two stocks had some of
the most options contracts outstanding among companies in the
S&P 500.
Merger-arbitrage hedge funds have returned 1.4% this year,
according to industry-tracker HFR data as of June 7, in line with
the broader hedge-fund industry and below the S&P 500's 3.6%
return as of Tuesday.
But it has already been a tough year for merger-arb hedge funds.
Bets on Akorn Inc.'s troubled sale to Fresenius SE cost some
dearly. Others lost money on Xerox Corp., which walked away from a
deal with Fujifilm Holdings Corp. Others were dinged by Qualcomm
Inc.'s takeover of NXP Semiconductors NV, a white-knuckled ride as
Broadcom got involved and a deal that is now being held up by
Chinese regulators.
Funds have also been burned on big mergers and acquisitions in
the past few years, including the nixed twin health-insurance
mergers, Aetna Inc. with Humana Inc. and Anthem Inc. and Cigna
Corp., as well as the failed pipeline tie-up between Energy
Transfer Equity LP and Williams Cos. that ended up in protracted
litigation.
Another bump came when it was reported that AT&T had hired
Michael Cohen, President Donald Trump's personal lawyer, for advice
on the deal.
Options traders anticipated extreme volatility in both AT&T
and Time Warner shares ahead of the decision, Trade Alert data
show. Measures of expected swings in both stocks were near one-year
highs.
Meanwhile, skew, which tracks the cost to protect against stock
declines, is near a one-year low for AT&T shares, data show, a
potential sign that traders may not be bracing as much for a big
selloff in the stock. The deal's competing forces and complexity
may have warded off some investors, according to Jim Strugger,
derivatives strategist at MKM Partners.
"It's for the pros more so than the speculators," Mr. Strugger
said. "Do you really want to take the other side of the Department
of Justice?"
Liz Hoffman contributed to this article.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
June 13, 2018 05:44 ET (09:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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