By Gunjan Banerji
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (June 14, 2018).
AT&T Inc.'s victory in its legal battle to buy Time Warner
Inc. handed a win to 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.
TCI Fund Management Ltd., the London hedge-fund firm run by
Chris Hohn, held some 316,500 Time Warner shares at the end of
2017. By March 31, the firm's position had surged to nearly 7.5
million shares, according to data compiled by S&P Capital IQ.
The holding placed the firm among the company's 20 biggest
investors. TCI officials didn't immediately respond to requests for
comment.
Mr. Hohn's firm also has recently accumulated a large stake in
21st Century Fox Inc., another media company poised for a big deal,
The Wall Street Journal reported in April.
The AT&T-Time Warner 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 after-hours activity. Shares of Time
Warner jumped after the market closed Tuesday and rose 2.5%
Wednesday, according to FactSet. AT&T slipped 5.5%.
Also a winner: Canyon Capital Advisors LLC. The Los Angeles
hedge-fund firm made about $27 million in paper profits on
Wednesday and about $40 million in the past week, according to
people close to the matter. Time Warner was Canyon's third-largest
holding as of March 31 of this year, according to securities
filings. So far this year, Canyon has made about $75 million from
its Time Warner position, according to a person familiar with the
matter.
This person said Canyon viewed the companies' position in the
dispute to be stronger than that of the government. But if the
government emerged victorious, Canyon was confident Time Warner's
assets are valuable enough to make it an acquisition target by
someone else, at an even higher price, in the near term, the person
said.
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 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 had fallen 12% this year
to $34.35 before Tuesday's after-hours action. Time Warner 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 4%
return as of Wednesday.
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.
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, Gregory Zuckerman and Justin Baer contributed to
this article.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
June 14, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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