September 22, 2014
Due to u.s. laws on media ownershipSaturday, July 19, 2014
‘Murdoch cannot buy Tribune or L.A. Times
Time Warner said on Wednesday it had rebuffed Twenty-First Century Fox’s roughly 80-billion-dollar bid, or 85 dollars per share, in recent weeks over valuation and concerns that the Murdoch family will have too much power. But people familiar with Twenty-First Century Fox said Murdoch is determined to buy the rival media giant.
Hedge fund traders and options strategists said the traditional merger arbitrage trade — short Twenty-First Century Fox and buy Time Warner — played out when the news broke.
Arbitrageurs seek to profit on the difference in stock prices between an acquirer and the target. In a deal that involves the swap of stock, that generally involves buying the target’s shares and betting the acquirer’s will fall. Murdoch made a stock and cash offer for Time Warner.
But these traders said that the time for that bet may have passed. Time Warner’s stock has risen 21 percent to 86.12 dollars, since the news broke. Twenty-First Century Fox has fallen nearly 7 percent.
“Fox shares will spike higher if this deal is killed or if Time Warner bids for something,” making a defensive acquisition, one arbitrageur said. “Time Warner will also remain range-bound, unless there is a higher bid or it does something that destroys the process, or something to buy another company.”
So investors who missed that window must now make bolder bets if they still want in on the trade.
Sources have said that Twenty-First Century Fox could see more than $1 billion in synergies from a deal. One hedge fund manager said in his reckoning synergies from the deal could be as high as 1.5 billion dollars, which would allow Twenty-First Century Fox to pay as much as 95 dollars per share to 100 dollars per share and still have a deal be substantially accretive to 2016 earnings.
The hedge fund manager said many arbitrageurs are remaining long in shares of Time Warner, given Murdoch’s reputation as a tenacious dealmaker.
Murdoch, for example, overcame stiff resistance from some members of the Bancroft family to buy Dow Jones in 2007. But he did not raise his bid at the time.
“The key right now for me is, ‘What is my downside?’‘ said one hedge fund trader. “The price on the table is not the right price. It’s not going to get it done.’ The trader said he owns a relatively small position in Time Warner and is evaluating how — and whether — to place a bigger bet.
One way to put less money on the line while betting that Twenty-First Century Fox will raise its bid is to buy Time Warner stock options.