(Bloomberg) – Billions of dollars in arbitrage capital are looking for a new home after Elon Musk finally closed his $44 billion deal to buy Twitter Inc.
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Merger arbitrage traders, who make money by betting on the outcome of deals between public companies, are now turning to deals involving Activision Blizzard Inc., VMware Inc. and Albertsons Cos. after enduring months of a Twitter stock rollercoaster ride, according to a Bloomberg News survey of 10 event-driven and risk arbitrage trading desks this week.
The wide spreads on each of the trades – the difference between the buy price and where the target’s stock is currently trading – mean they offer the most potentially lucrative opportunities for arbitrages, as traders are familiarly known.
Mortgage software provider Black Knight Inc., regional bank First Horizon Corp. and the Tegna Inc. diffuser are also popular choices.
For those who held their bets that Musk would go through with the Twitter buy, Friday was a triumphant time to cash in and reap profits after months of uncertainty. Shares in the social media platform endured a tumultuous period of trading as the world’s richest man attempted to walk away from the deal, with shares falling around 40% below the takeover price in July.
“For the merger arbitrage community, it’s always good to see a problematic deal go through – Twitter certainly having been in the problematic category,” said Brett Buckley, an event-driven strategist at WallachBeth Capital, who has estimated billions of dollars from merger arbitrage. the funds were tied to the situation. However, not everyone will have made money, he said, due to the unpredictable developments that rocked the stock over the US summer.
Here’s a breakdown of the offers that will be next to catch merchants’ attention:
Microsoft – Activision Blizzard
The purchase of Activision Blizzard by Microsoft Corp. for $69 billion, announced in January, is one of the biggest mergers in U.S. history, and Warren Buffett is among the investors who bought Activision shares in a merger arbitrage bet . Shares of the video game company are still more than 22% below Microsoft’s offer price, due to increased antitrust scrutiny in the United States and Europe. A widespread slump in the tech industry is also pushing investors to price in greater downside risk if the deal fails. The companies expect to close the deal in the first half of 2023.
Broadcom Inc. agreed to pay about $61 billion for VMware in May in the largest-ever takeover of a semiconductor maker. Given the effective value of the cash and stock offer of around $130 per share, VMware’s current price is offering an upside of around 13% to anyone willing to bet on the deal. The spread is expected to remain wide until the transaction obtains some major regulatory approvals, given its size and the possibility of lengthy review. But merger arbitration specialists aren’t overly concerned about antitrust risks, a Bloomberg News survey showed in May. The companies aim to complete the deal by November next year.
Kroger Co. this month announced plans to buy Albertsons in a deal valued at about $25 billion, including debt, that brings together the nation’s second- and fourth-largest grocers. The merger has drawn skepticism from US senators and is expected to face tough antitrust criticism. Arbs initially sat on the sidelines due to a potential tax liability in Albertsons’ special dividend, but the window to receive that payment closed on October 21, allowing speculators to return. Albertsons shares are trading around $20.40 – well below the $34.10 offer, which included the special dividend. The transaction is not expected to close before 2024.
Arbs is also focused on Intercontinental Exchange Inc.’s acquisition of Black Knight in a $13 billion cash and stock deal, announced in May. First Horizon and the Toronto-Dominion Bank are still closing the $13 billion combination announced in February, while Standard General LP’s planned $5.4 billion purchase of broadcaster Tegna awaits approval from the Federal Communications Commission, among other regulators.
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