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Hedge Funds Rack Up a Win on AT&T Deal -- WSJ

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06/14/2018 | 08:48am CEST

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

Stocks mentioned in the article
ChangeLast1st jan.
AT&T 0.42% 33.225 Delayed Quote.-14.89%
DJ INDUSTRIAL 0.06% 25567.76 Delayed Quote.3.40%
NASDAQ 100 -0.68% 7323.7981 Delayed Quote.15.29%
NASDAQ COMP. -0.57% 7761.3612 Delayed Quote.13.08%
S&P 500 0.79% 2840.69 Real-time Quote.5.41%
TIME WARNER 0.00%-End-of-day quote.7.98%
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Financials ($)
Sales 2018 173 B
EBIT 2018 32 898 M
Net income 2018 20 735 M
Debt 2018 170 B
Yield 2018 6,05%
P/E ratio 2018 11,06
P/E ratio 2019 10,98
EV / Sales 2018 2,34x
EV / Sales 2019 2,13x
Capitalization 236 B
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Mean consensus HOLD
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Average target price 35,9 $
Spread / Average Target 8,5%
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Randall L. Stephenson Chairman, President & Chief Executive Officer
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