TeddyLampert Posted May 19, 2014 Share Posted May 19, 2014 So how does it work at this point? With the stock currently at $85, what is the path to $95 from here? Is it a slow grind up, or it just reprices at some point on some announcement? I'm just trying to understand why the shares would decline right after the deal was announced. Would anyone be buyers currently (to take the $10 spread)? Please someone tell me what I'm missing. Thanks. Link to comment Share on other sites More sharing options...
Guest wellmont Posted May 19, 2014 Share Posted May 19, 2014 couple things. T declined over 1% at one point. That hurts the price since you are getting T shares. Some DTV holders don't like deal to sell to T and don't think another is going to emerge. so they are selling. they don't want to take a utility (T) in exchange for DTV (no more optionality). I think it's probably a pretty safe bet to own DTV here for market beating returns over the next year. Link to comment Share on other sites More sharing options...
TeddyLampert Posted May 19, 2014 Share Posted May 19, 2014 Am I naive to think that the decline in T does not matter for the price of DTV since the share ratio will adjust so that on judgment day you get your cash + T shares equal to $95? Link to comment Share on other sites More sharing options...
compounding Posted May 19, 2014 Share Posted May 19, 2014 There are a couple of things that could break the deal as well: DTV shareholders approval, regulatory approval and the possibility that the NFL contract is not renewed. Mike White said on the call today that he is highly confident that the NFL contract will be renewed. They talked a lot about regulation on the call as well and have had advisors look closely at it. T is also selling their America Movil shares to not have a regulatory problem in Latin America. DTV shareholders? No idea. Would be interesting to know what the BRK guys are thinking and doing. Link to comment Share on other sites More sharing options...
constructive Posted May 19, 2014 Share Posted May 19, 2014 Am I naive to think that the decline in T does not matter for the price of DTV since the share ratio will adjust so that on judgment day you get your cash + T shares equal to $95? T price does matter. The terms of the deal are not just cash + T shares equal to $95. Look at the graph I posted. My assumption on the spread was overly optimistic, but the shape is still correct. Link to comment Share on other sites More sharing options...
SFValue Posted May 19, 2014 Share Posted May 19, 2014 There are a couple of things that could break the deal as well: DTV shareholders approval, regulatory approval and the possibility that the NFL contract is not renewed. Mike White said on the call today that he is highly confident that the NFL contract will be renewed. They talked a lot about regulation on the call as well and have had advisors look closely at it. T is also selling their America Movil shares to not have a regulatory problem in Latin America. DTV shareholders? No idea. Would be interesting to know what the BRK guys are thinking and doing. "This is a terrific transaction for all involved: Enhanced choice for consumers, coupled with increased value for both AT&T and DirecTV shareholders—a natural," said investment managers Todd Combs and Ted Weschler of Berkshire Hathaway. Berkshire has been a top shareholder of DirecTV. Link to comment Share on other sites More sharing options...
Guest wellmont Posted May 19, 2014 Share Posted May 19, 2014 I think brk likes this combo. makes T more stable and more diversified and less risky. they might be buying dtv/t here. Link to comment Share on other sites More sharing options...
thefatbaboon Posted May 19, 2014 Share Posted May 19, 2014 There are a couple of things that could break the deal as well: DTV shareholders approval, regulatory approval and the possibility that the NFL contract is not renewed. Mike White said on the call today that he is highly confident that the NFL contract will be renewed. They talked a lot about regulation on the call as well and have had advisors look closely at it. T is also selling their America Movil shares to not have a regulatory problem in Latin America. DTV shareholders? No idea. Would be interesting to know what the BRK guys are thinking and doing. "This is a terrific transaction for all involved: Enhanced choice for consumers, coupled with increased value for both AT&T and DirecTV shareholders—a natural," said investment managers Todd Combs and Ted Weschler of Berkshire Hathaway. Berkshire has been a top shareholder of DirecTV. Where is this quoted from? Link to comment Share on other sites More sharing options...
TeddyLampert Posted May 19, 2014 Share Posted May 19, 2014 Constructive, Thanks for pointing out your chart. As I understand it, it looks like if T falls below around $35, then current DTV holders will get less than the final value of $95. With DTV at $36, I don't get why that would cause DTV's price to take a hit (currently). Unless you have better alternatives, holding out for the $10 arb spread to close doesn't seem like such a bad option. That's a 12% return assuming 12 months. If I recall from reading the BRK letters correctly, it's better to speculate on merger arb deals when it's an all cash transaction. I can understand why the stock element creates some additional uncertainty. I own shares of DTV and am considering just holding, and just want to make sure I'm not doing anything stupid. BTW, I can't read into what Ted and Todd's comments imply-- whether they are selling today or holding on. Anyone else? Thanks all for the very useful discussion Link to comment Share on other sites More sharing options...
compounding Posted May 19, 2014 Share Posted May 19, 2014 There are a couple of things that could break the deal as well: DTV shareholders approval, regulatory approval and the possibility that the NFL contract is not renewed. Mike White said on the call today that he is highly confident that the NFL contract will be renewed. They talked a lot about regulation on the call as well and have had advisors look closely at it. T is also selling their America Movil shares to not have a regulatory problem in Latin America. DTV shareholders? No idea. Would be interesting to know what the BRK guys are thinking and doing. "This is a terrific transaction for all involved: Enhanced choice for consumers, coupled with increased value for both AT&T and DirecTV shareholders—a natural," said investment managers Todd Combs and Ted Weschler of Berkshire Hathaway. Berkshire has been a top shareholder of DirecTV. Where is this quoted from? Here's something: http://money.cnn.com/2014/05/19/news/companies/att-directv-reaction/ Haven't found a direct link to the statement if there is one. Link to comment Share on other sites More sharing options...
thefatbaboon Posted May 19, 2014 Share Posted May 19, 2014 thx compounding. I see the quote now on wsj too. Link to comment Share on other sites More sharing options...
thefatbaboon Posted May 19, 2014 Share Posted May 19, 2014 Constructive, Thanks for pointing out your chart. As I understand it, it looks like if T falls below around $35, then current DTV holders will get less than the final value of $95. With DTV at $36, I don't get why that would cause DTV's price to take a hit (currently). Unless you have better alternatives, holding out for the $10 arb spread to close doesn't seem like such a bad option. That's a 12% return assuming 12 months. If I recall from reading the BRK letters correctly, it's better to speculate on merger arb deals when it's an all cash transaction. I can understand why the stock element creates some additional uncertainty. I own shares of DTV and am considering just holding, and just want to make sure I'm not doing anything stupid. BTW, I can't read into what Ted and Todd's comments imply-- whether they are selling today or holding on. Anyone else? Thanks all for the very useful discussion I too own DTV shares. Unless you have good use for the capital elsewhere I don't think there is anything to do but hold. It would be crazy to sell at $85 just to raise cash. I would rethink this question if it went over $92 soon. Although this is of course time sensitive and ATT stock price sensitive. The higher ATT is and the closer the deal looks the higher the DTV price where I would continue to hold. Also, given a number of good investors recent investments in VZ & T and Ted and Todd's recent comments on the merger, I think we all need to take some time to see if we wouldn't like to hold T. (Particularly relevant if you have a lot of taxable gains in your DTV position) Link to comment Share on other sites More sharing options...
SFValue Posted May 19, 2014 Share Posted May 19, 2014 There are a couple of things that could break the deal as well: DTV shareholders approval, regulatory approval and the possibility that the NFL contract is not renewed. Mike White said on the call today that he is highly confident that the NFL contract will be renewed. They talked a lot about regulation on the call as well and have had advisors look closely at it. T is also selling their America Movil shares to not have a regulatory problem in Latin America. DTV shareholders? No idea. Would be interesting to know what the BRK guys are thinking and doing. "This is a terrific transaction for all involved: Enhanced choice for consumers, coupled with increased value for both AT&T and DirecTV shareholders—a natural," said investment managers Todd Combs and Ted Weschler of Berkshire Hathaway. Berkshire has been a top shareholder of DirecTV. Where is this quoted from? http://www.cnbc.com/id/101683629 Link to comment Share on other sites More sharing options...
constructive Posted May 19, 2014 Share Posted May 19, 2014 Unless you have better alternatives, holding out for the $10 arb spread to close doesn't seem like such a bad option. That's a 12% return assuming 12 months. No, it's not a bad option. However, my minimum rate of return for arbitrage is 20%. A 12% arbitrage return doesn't support my overall portfolio goals. I do think I can raise cash and find returns elsewhere. To get to 20%, I need to have a positive view on the price of T over the next year. DTV shares have less than 100% leverage to T share price, so T needs to increase over ~16% to produce a 20% return. Link to comment Share on other sites More sharing options...
thefatbaboon Posted May 19, 2014 Share Posted May 19, 2014 constructive, And unfortunately we don't get any benefit to the exchange rate to reflect T's dividend payments. The thing that irks me in this deal is that T is paid to wait (DTV collects cash and gets cheaper, and T shareholders get their dividends) while us DTV shareholders get a worsening deal the longer it takes and no dividend. Regarding your 20% target for arb, is that an unlevered target? Other than 08/09 I don't come across 20% ul IRR very often! Link to comment Share on other sites More sharing options...
rogermunibond Posted May 19, 2014 Share Posted May 19, 2014 Longleaf sold a few quarters ago in the $60-70 range saying that DTV had met their 90% of IV threshold, iirc. What does this say about a) their valuation or b) the price that T is paying? Link to comment Share on other sites More sharing options...
thefatbaboon Posted May 19, 2014 Share Posted May 19, 2014 They sold most of their shares in Q1 (about 1m shares in Q4 and 6m shares in Q1). So, I'd imagine they would have sold between 70 and 78. Let's say $72. So that means their IV was $80. That's pretty consistent with a mid-2015 intrinsic value of $95. If anything it reinforces my feeling that AT&T paid very very little by way of premium. Link to comment Share on other sites More sharing options...
constructive Posted May 19, 2014 Share Posted May 19, 2014 Regarding your 20% target for arb, is that an unlevered target? Other than 08/09 I don't come across 20% ul IRR very often! Yes. For the past few years I have only done ~2 per year. On average they have been 2 to 4 month, cash deals, over 40% annualized. So I look for a pretty big discrepancy between the market's perception of deal risk versus mine. I'd be willing to go down to 20% for a longer, more certain deal, but not any lower. Link to comment Share on other sites More sharing options...
thefatbaboon Posted May 19, 2014 Share Posted May 19, 2014 Regarding your 20% target for arb, is that an unlevered target? Other than 08/09 I don't come across 20% ul IRR very often! Yes. For the past few years I have only done ~2 per year. On average they have been 2 to 4 month, cash deals, over 40% annualized. So I look for a pretty big discrepancy between the market's perception of deal risk versus mine. I'd be willing to go down to 20% for a longer, more certain deal, but not any lower. How can you stomach it! I'm too lazy - 425s put me to sleep - all those horrible never ending sentences. In my younger days I remember reading a single paragraph over and over for 4 hours. It was one of those sentences with clauses and subclauses with adverbs and negatives and double negatives. Link to comment Share on other sites More sharing options...
fareastwarriors Posted May 19, 2014 Share Posted May 19, 2014 One DirecTV Investor Takes His Chips Off the Table http://blogs.wsj.com/moneybeat/2014/05/19/one-directv-investor-takes-his-chips-off-the-table/?mod=WSJ_LatestHeadlines Link to comment Share on other sites More sharing options...
Libs Posted May 19, 2014 Share Posted May 19, 2014 Can someone explain the tax implications of this....say you bought DTV for $50 and receive $95 in cash and T stock combined. What is the immediate tax impact? Link to comment Share on other sites More sharing options...
Yours Truly Posted May 19, 2014 Share Posted May 19, 2014 One DirecTV Investor Takes His Chips Off the Table http://blogs.wsj.com/moneybeat/2014/05/19/one-directv-investor-takes-his-chips-off-the-table/?mod=WSJ_LatestHeadlines It's okay, Tod and Ted love the deal and haven't sold yet http://m.us.wsj.com/articles/BL-MBB-21383 Link to comment Share on other sites More sharing options...
gfp Posted May 19, 2014 Share Posted May 19, 2014 Can someone explain the tax implications of this....say you bought DTV for $50 and receive $95 in cash and T stock combined. What is the immediate tax impact? Hey Libs - here you go: http://tinyurl.com/pgmhb8v Link to comment Share on other sites More sharing options...
Libs Posted May 20, 2014 Share Posted May 20, 2014 Can someone explain the tax implications of this....say you bought DTV for $50 and receive $95 in cash and T stock combined. What is the immediate tax impact? Hey Libs - here you go: http://tinyurl.com/pgmhb8v Thanks GFP. Very helpful. I'm going to add to my DTV at $83. That's too large of a spread. Even if the deal falls through I think this will work out. On its own the stock could be worth $125 in 2-3 years any way. Link to comment Share on other sites More sharing options...
rayfinkle Posted May 22, 2014 Share Posted May 22, 2014 For folks with experience in this type of arena... any suggestions on how to use options to "close the spread" sooner? E.g., at $83.90 (now), the path to 95 is +13%. Theoretically you can create this same exposure by writing options (a few dif. ways depending on how you want to create the risk / reward), or buying calls (essentially levering your results against a timeframe). The 1/16 $85 calls are at ~$5, with intrinsic value of $10 @ DTV underlying of $95 (ignoring trans. costs). So, a few questions: 1) has anyone taking the writing options path before, if so: what have you learned? 2) what would happen to the calls assuming the transaction goes through before expiry at $95? I assume that as the market perspective accepts that the merger will happen the stock will trade up towards $95 (so option will increase in value), but what happens if you hold? Link to comment Share on other sites More sharing options...
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